Managers and shareholders use various models to conduct stock valuations. However, in order to do so effectively it is important to understand what influences stock prices. The article aims to access corporate management as a key influencer of stock value as well as the impact of external factors on this relationship. The study uses practical and scientific methods in accordance to various influential factors such as market conditions, demand, supply, competition, domestic and global markets to value companies effectively.
According to the previous literature, ownership of investment companies by major shareholders of the investee company can have a negative influence on share price. Another study states that non-operating profits that are
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The research identified several factors that may influence stock valuation. The author suggests that government spending is one of the influencers over stock price. This is because state ownership is believed to impose expenses on companies which reduces company profits and stock value. The political system and shareholders can also impact a company’s management. A negative relationship between stock value and management exists if banks become major shareholders of companies. If shareholders are from investment companies, the relationship is positive. This is because banks are influenced by political issues and under pressure of political parties. Institutional investors as shareholders can also control stock price. They can enhance stock value as regulators and with the use of corporate mechanisms. Conversely, if they reduce the value of minority stocks it will reduce their stock value in the long run. A company’s financial health is directly correlated with the level of institutional investors which means that that the higher the level of investors the higher the financial health. Although the influential factors being studied were qualitative they can be explained using models which is why the author used economic models to determine their impact on stock …show more content…
Based on this model the author determined that if the rate of return is lower than the company’s discount rate the share price decreases and if it is higher the share price rises. The second model used was the Walter model. According to this model if the Internal rate of return is greater than cost of capital the share price increases and if it is lower it declines. The model also revealed that an insolvent company’s debt to equity ratio is at optimum when it is equal to one. The ratio is not important for an ordinary company as the rate of return equals the cost of capital. The optimum debt to equity ratio for a developing company will be zero. Based on these findings the author determines that factors such as conditions of the industry, demand and supply, domestic, global markets, technology, company life, competition need to be accounted for when valuing stocks. The result of the study suggests that manager’s success in stock valuation depends on the correct understanding of these influential resources and acclaim managers should increase the value of their company’s stock by proper use and combination of these factors. Managers should therefore increase stock values through investing companies, institutional investors, bonus shares and models such as Gordon and
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
– Investments in other businesses indicate that management is only concerned with earning a salary and not the earnings of the shareholders themselves. If they owned a greater stake, it would be their money at risk as well, encouraging and driving a stronger work ethic. Currently, it would be classified as a moral hazard.
The CAPM is the best method of determining the cost of equity for General Mills, inc. (NYSE: GIS). Using CAPM calculations, GIS target for December 2013 is $50.60 (Reuters, 2013). If this security becomes untenable in one year’s time, then the option of increasing dividends to boost investor confidence can be explored. The APT is less accurate compared to the CAPM and the dividend growth models. However, CAPM seems to be the easiest to use. The isolation of the Beta assumptions into a single variable fits the current state of the company best when using the CAPM.
Having a low P/E ratio with respect to the rest of the market, and the replacement cost of the firm being greater than its book value (argument 3), there is a good chance that the current stock price and the proposed offering price are too low. Although long-term debt is a better financing choice, a few of the drawbacks are pointed out. Debt holders claim profit before equity. holders, so the chances that profits may be lower than expected. increases risk to equity, may reduce or impede stock value. However, the snares are still a bit snare.
The financial position of a company offers great insight on the performance of the company on short-term and long-term basis. This work argues that Facebook Inc. is a company with a subjective investment portfolio. The purpose of this paper is to use ratio analysis to determine the position of the Facebook as an investment destination. The first section explores two ratios and their implications to a potential investor. The second part evaluates whether Facebook is bankrupt. The succeeding section offers advice to potential investors. The work culminates by highlighting key points and making necessary recommendations.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
It was the conclusion of the author that financial ratios when combined with statistical analysis still remain a valuable tool. The theoretical conclusion was that ratios used within a multivariate framework take on a more influential role than when used in isolation. The discriminate model was very accurate in the initial sample of 66 firms, correctly predicting 94 percent of the original bankrupt firms. The potential suggested used of the model included: business credit evaluation, investment guidelines and internal control procedures. The MDA model also showed potential to ease some problems in the selection of securities of a portfolio but further investigation was recommended.
The reason I select Masteel’ stock to analyse is because I have looked back the historical stock chart of Masteel from 2009 to 2015, it is a declining price movement. Masteel achived the highest RM1.5 price in 2011 but it reduced to RM0.4 price in 2015. This historical price of stock in Masteel made me curios on its current intrinsic value and are this stock is worth to invest now? Thus, I would like to analyse Masteel’s stock value through stock valuation in part B, to figure out whether Masteel is worth to invest now and expect the price will increase in future.
However there are consequences which privately equity funds additionally tend to aim to maximise their returns by an increase on efficiencies and cutting prices during the short run as where they control a company. In resulting of cost cutting which would occur towards unfavourab...
The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business. Finally, the paper will give a summary of important highlights discussed in the body of the paper.
Apple Inc.’s Financial Analysis case study will cover the nine-step assessment process to evaluate the company’s future financial health. The nine-step evaluation process will entail the following: 1) Fundamental analysis covers objectives, plan of action, market, competing technology, and governing and operational traits, 2) Fundamental analysis-revenue direction, 3) Investments to support the firm’s entities action plan, 4) Forthcoming profit and competitive accomplishment, 5) Forthcoming external financial requirements, 6) Accessibility to direct at sources of external finance, 7) Sustainability of the 3-5 year plan, 8) Strain examination beneath scenarios of calamity, and 9) Present financial plan (State University, 2013). The fundamental analysis will be explained primarily in the next section.
Choosing two profitable stocks amongst a myriad of potential alternatives is a daunting task to say the least. In order to narrow my choices from thousands to two, I examined several aspects of companies I was interested in. Among these were, company overview, alpha and beta ratings, price ratios, price charts, and company headlines. After evaluating this information, I chose Intuit INC (INTU) listed on the NASDAQ and Johnson and Johnson (JNJ) listed on the NYSE.
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.