Question 12.C-R-Q.4: Lampet plc trades its shares on the London Stock Exchange. R...
Lampet plc trades its shares on the London Stock Exchange. Recently, the chief financial officer calculated the value of a share in the business, using the free cash flow method, at £8.65. These calculations incorporated current growth predictions. Each share is currently trading at £7.90. Suggest at least three possible reasons for the difference between the two share values mentioned.
Various reasons could be put forward to account for the difference between the two share prices mentioned. They include the following:
■ The market does not share the chief financial officer’s (CFO) views concerning future risk and returns. Perhaps the CFO is more confident than the market on these atters.
■ Limpet plc’s current growth prospects are not yet in the public domain. Unless the stock market is strong-form efficient, private information would not be reflected in the share price.
■ The market has not processed all information relating to Limpet plc quickly and in an unbiased manner. This implies, however, that the market is inefficient.
■ The calculations undertaken by the CFO contain errors.
You may have thought of other reasons.