ABC Company stock currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its level of risk and therefore Marco increases his required rate of return on ABC stock. This change in the required rate of return
A) will reduce the intrinsic value of ABC stock to Marco.
B) will increase the intrinsic value of ABC stock to Marco.
C) will change the intrinsic value but the direction of the change cannot be determined.
D) is a signal to Marco that he should buy more ABC Company stock.

Question

Quizplus · Accepted Answer

When an investor increases their required rate of return, the present value of future cash flows from an investment, which determines its intrinsic value, decreases. This is because the cash flows are discounted at a higher rate, reducing their present value.

ABC Company Stock Currently Has a Market Value Equivalent to Its