solution

A business can be valued by capitalizing its earnings stream (see example 6.19). How might you use the same idea to value securities, especially the stock of large publicly held companies? Is there a way to calculate a value that could be compared to the stock’s market price that would tell an investor whether it’s a good buy? (If the market price is lower than the calculated value, the stock is a bargain.) What financial figures associated with shares of stock might be used in the calculation. Consider the per-share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share, etc. Does one measure make more sense than the others? What factors would make a stock worth more or less than your calculated value?

QUESTIONS

NOTE: TYPE YOUR RESPONSES IN THIS DOCUMENT. THE DOCUMENT WILL EXPAND AS YOU ENTER YOUR RESPONSES. SUBMIT THE COMPLETED DOCUMENT TO THE DROPBOX BY THE END OF MODULE #6.

STUDENT NAME:

Comment how a private company is valued by capitalizing a stream of earnings because all of a firm’s earnings are available to its owners.

Explain the relationship between the stocks of publicly held companies and dividends, as they represent cash received by stockholders.

Comment on dividends and why stockholders are interested in them.

What kinds of dividends do stockholders prefer, a stable stream or ones that vary from year-to-year?

Comment on the importance of EPS and Dividend Yield ratios.