The Highlight Company Has a Book Value of $56

question 34

Multiple Choice

The Highlight Company has a book value of $56.50 per share, and is currently trading at a price of $59.00 per share. You are interested in investing in Highlight, and have just used a present-value based stock valuation model to calculate a present (intrinsic) value of $55.00 per share for Highlight's stock. Assuming that your calculations are correct you should

• A) buy the stock, because the current market price per share is higher than the present value.
• B) buy the stock, because the book value per share is greater than the present value.
• C) not buy the stock, because the present value is less than the market price per share.
• D) buy the stock, because the book value and the current trading price are very close to one another in value.

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Definitions:

Novation

The process of replacing an obligation to perform with a new obligation or substituting a new party to an agreement.

Anticipatory Repudiation

An assertion or action by a party indicating they will not perform their future obligations under a contract, allowing the other party to treat the contract as breached.

Objective Standard

A guideline used in law that is based on what a reasonable person would believe or do under the circumstances, rather than on the subjective intentions of the parties involved.

Illusory Contract

An agreement that lacks a binding obligation from one or more parties, typically because terms are too vague or one party has the option not to perform their promise.