I have 2 assumptions here, but i don't wheter it is correct.
There first assumption is the firm is able to continue its operation and generate profits, and that it can continues to pay ordinary shares
The second one is the investor intends to hold the shares permanently.
is it correct?and are there any more assumptions?
2007-02-26 13:01:21 · 4 answers · asked by Lisa S 1 in Business & Finance ➔ Investing
IT is typically assumed that the growth rate of thecompany's earnings will remain constant and not increase or decrease.
THe second assumption about holding period is irrelevant. the value of a share is not dependent on who owns it.
2007-02-26 13:10:01 · answer #1 · answered by Anonymous · 0⤊ 0⤋
The share you buy are EXISTING shares of the company. You can derive a sense of the value of those shares by dividing the book value of the company by the total number of shares and get a book value per share. Or you can measure gross revenue or sales per share ( the P/S ratio) or the annual profits/earnings per share (P/E ratio).
The assumptions you have not considered are - can the company issue MORE shares or does the company plan to buy back its own shares? LESS shares. The former action decreases the value of your stock and the latter increases the value of your stock.
Finally, and this is a big assumption, there are no options granted but unexercised given to management that will INCREASE the total number of shares outstanding of this company. You will see that many companies quote earnings per share and then "earnings per share - fully diluted" which is what would happen if the managers cashed in!
Finally, how many shares are actively traded? Insider/founders may own a large block of shares in the company and this may be a large percentage of the total company - Gates and Gates Foundation/Microsoft and the two guys at Google!
2007-02-26 13:47:58 · answer #2 · answered by rarguile 6 · 0⤊ 0⤋
Your assumptions may be true but the real assumptions made in valueing a company is that they are capable of payind dividends for a long time, the reinvestment rate of return is constant, company grows at predetermined pace and the return covers for the preceived risk.
2007-02-27 03:25:17 · answer #3 · answered by Mathew C 5 · 0⤊ 0⤋
Assume you have made the investment?
2007-02-26 13:04:37 · answer #4 · answered by smiling_freds_biz_info 6 · 0⤊ 0⤋