Impacts to Common Stock Prices
Week 4 Discussion 2
Impacts to Common Stock Prices
These resources will help you to complete this discussion:
Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications(5th ed.). New York, NY: McGraw-Hill.
Chapter 6, “Stock Valuation,” pages 165–194.
(n.d.). Capital stock (common stock and preferred stock)[Video]| Transcript. Retrieved from https://www.youtube.com/watch?v=TZ2uWgtQXBo
(2012). Session 08: Objective 1 – common stock valuation[Video]| Transcript. Retrieved from https://www.youtube.com/watch?v=uajW4BWh_zY
Harper, D. (2018, February 18). Forces that move stock prices.Retrieved from https://www.investopedia.com/articles/basics/04/100804.asp
The primary way a stock price is valued is the employment of the time value of expected cash flows that the company will generate. Most of the time, a metric to monitor future cash is earnings. This is why earnings per share (EPS) is probably the most watched financial ratio on the market. It is anticipated that earnings will turn into cash, which would enrich shareholders through the issuance of cash dividends and the repurchases of shares so that current shareholders will own a bigger share of the company earnings and resulting value.
Knowing how stock prices are impacted is key knowledge for financial management, since its primary goal is to increase the firm’s stock price. Knowledge of how increased earnings and cash flows can be generated by a firm’s investments can greatly influence the attractiveness of said investments to the firm.
As a business professional, you should realize how stock prices fluctuate and how a company can influence directly and indirectly its own stock price. However, the prices calculated in academic formulas typically vary significantly from the actual market price traded on the stock exchanges. This shows how there are so many factors that impact stock price beyond the time value of money and growth formulas.
For this discussion, you are the CFO who accompanied the CEO to the annual shareholders’ meeting. The CEO gave an excellent speech that outlined the company’s strategic plan, for which he received thunderous applause and praise. Later that week, the CEO calls you, angrily demanding that you, as the CFO, explain to him why the price of the stock was unmoved by his performance and, in fact, dropped.
In your post, provide an explanation to the CEO about what impacts the stock price and what factors cause stock prices to rise and fall. Plus, you will need to indicate why actual market stock prices sometimes vary greatly from academic stock valuations via formulas.
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