What is intrinsic value in stock valuation?

Intrinsic value represents the true, inherent worth of a stock, determined through fundamental analysis, rather than its current market price. The correct choice highlights that intrinsic value is calculated as the present value of expected future cash flows that the asset is anticipated to generate. This approach integrates projections of future earnings and cash flows, discounted back to their present value using an appropriate discount rate.

This method allows investors to make more informed assessments regarding whether a stock is undervalued or overvalued relative to its current market price. By focusing on the fundamental financial prospects of the company, this definition captures the essence of intrinsic value in stock valuation.

In contrast, market price reflects the price at which a stock is currently trading and can be influenced by various factors, including market sentiment and trends, not necessarily reflecting its true worth. Book value, derived from accounting records, provides a snapshot of a company's assets minus its liabilities but doesn't account for future earning potential. Finally, the average historical price may inform about past performance but lacks relevance in determining the current intrinsic value. Each of these alternatives fails to encompass the concept of intrinsic value as effectively as it is defined through the evaluation of future cash flows.