Fundamental vs market value: A study on of selected pharma stocks

Abstract

The investment decision to buy or sell a security is always based on the comparison of its intrinsic value with that of its market value. Because Fundamental analysts believe that each share has an intrinsic value and this value is the realization of all the future cash flows in the form of capital appreciation and dividend. This empirical study aims at assessing the fundamental value or intrinsic value of a share using Gordon and Shapiro model (1956) of general dividend discount model (the model assumes a unique dividend growth rate as “g” and Multiplier Approach of valuation using P/E ratio. Both the approaches are based on the principle that the value of any investment is the present value of all its future cash flows. Along with it the study analyses the deviation of the calculated intrinsic value with its market price. It focuses on Indian Pharmaceutical sector taking “A” category shares into consideration as these shares are traded every day. This study checks whether the share is overpriced or under priced by comparing the calculated fundamental value with that of the market value.