This is regarding return concepts and section 2.4 in reading 29.
Expected return = required return + convergence to intrinsic value (good so far)
from page 51 of equity book:
“To illustrate, in august of 2013, one estimate of the required return for Toyota Motors shares was 6.3%. At a time when Toyota’s ADR market price was $127.97, a research report estimated the company’s intrinsic value at $176.30. Thus, in the author’s view, Toyta was undervalued by V0 - P0 = $176.30 - $127.97 = $48.33, or 37.77% as a fraction of market price. If price were expected to converge to value in exactly one year, an investor would earn 37.77% + 6.3% = 44.07%.”
This I do not understand. If the price converges to the analyst’s intrinsic value in a year, the return would just be the 37.77%, would it not? I get that the required return is 6.3%… but it seems like that is already accounted for in the intrinsic value that the analyst is forecasting, so the alpha should be 37.77% - 6.3% = 31.47%. If the required return is 6.3% then the share should be expected to rise by that amount anyway, no?
Any help on this? Feeling dense.