Citigroup Interview Question

What role does a stock valuation have? Why can't you assess a company's worth solely on stock price?

Investment Banking Analyst: Round 1

1 answers


Stock price is arbitrary and can be manipulated without affecting the value of the company at all. Think about a stock split. A company can decide if it wants to split its stock, give everyone 2x the shares, and half the price of the stock. In no way does this change the value of the company, it is just a cosmetic change...valuation of a company is important and there are many ways to compare companies, such as p/e ratio, discounted cash flows, etc. But the trading price of the stock is not one of them.

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