Share Price Case Study

3514 Words15 Pages
Share Price A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In other terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. Behaviour of Share Prices In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets, currency exchange ratesand commodity prices. This practice has its basis in the presumption that investors act rationally and without biases, and that at any moment they estimate the value of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly. Dividend A dividend is a payment made by a corporation to its…show more content…
.its retention ratio, b , is zero). Thus , the company’s dividend per share(DIV) will equal the earnings per share(EPS) , and its earnings and dividends would not grow since it does not reinvest any earnings. What would be the price of company’s share if the opportunity cost of capital were 12% ? We can use the following formula: P0 = DIV1/ke - g = EPS1(1-b)/ke – rb = 6.67(1-0)/0.12 – 0 = 6.67/0.12 = Rs 55.58 Notice that since retention ratio, b, equals to zero, then DIV1 = EPS1 and g = rb = 0 and P0 is given by the earnings per share divided the opportunity cost of capital, ie., P0 = EPS1/ke. Suppose that the company would pay dividend of Rs 4 per share in the first year and reinvest the retained earnings (RE) at a rate of return (r = ROE) of 20 %. What is the company’s payout ratio, retention ratio and growth rate? Payout ratio = DIV1/EPS1 = 4/6.67 = 0.6 = 60

More about Share Price Case Study

Open Document