Assignment 2 Chapter 4- The Value of Common Stocks

Assignment 2

Chapter 4- The Value of Common Stocks

Question 1: Understanding of Earnings Per Share (EPS)

According to Investopedia (2021), earnings per share is used in comparing earnings of various organisations. To obtain this ratio, it is calculated as an organisation profit divided by the outstanding shares of its common stock. Hence, the outcome evidence on the organisation profitability. Hence, the higher the EPS value, the higher the profitable the organisation.

For the investors, they need to put into account on the EPS since this value influence the stock prices. According to Finance Management (2021), in the organisations which have strong earnings are noted to have a high stock price increasing and vice versa is true. Often, an organisation having a skyrocketing price evidence that the investors’ expectations is that their organisation would make profits as a future-best practice. nevertheless, it is not a guarantee that an organisation would meet their entire stakeholders’ expectations holistically.

Also, it is important for investors to gauge the prices of a share as this evidence on the intrinsic value of their stock not linked to current cost. According to CFI (2021), through noting the intrinsic value of a stock, it is possible for the investor to establish if the share is over or under-valued at its current market price.

Ultimately, by establishing the total earnings, the organisation value is established and evaluated in context of the EPS. This is the core demonstrator of the organisation financial health. This is since it dictates the organisation journey towards offering a solid return for their different investors.

Question 2: Why Firms Buy Back Shares from Investors

In Investopedia (2021a), this practice is identified as a stock buyback. It is defined as a process used by a firm to repurchase shares of stock by the company that had issued them. This phenomenon is evident when an organisation offers their shareholders the market value per share and re-absorbs the portion of ownership which was in the past distributed among the public and private investors.

According to Pettit (2001), with stock buybacks, an organisation is able to purchase their stocks on the open market from their shareholders directly. In the recent past, share payback overtake the dividends as a preference for returning cash to shareholders.

According to Bankrate (2022), organisations buy shares from investors as a significant approach for using their resources which is core for investing in their practices, pay off their debt, buying another organisation and pay out resources as dividends to their investors. Also, as evidenced in Investopedia (2021a), owing to organisations raising equity capital through the sale of common and preferred shares, it is viewed as being counter-intuitive that an organisation could select to offer money back. The outcome of this is achieving ownership consolidation, undervaluation and boosting their core financial ratios.

To illustrate the reason for buying back shares from investors, the case study of Walt Disney (DIS) lower their outstanding shares in the market by purchasing back 73.8 million shares of a collective value of approximately $7.5 billion from year 2016. This  value was evident from the organisation buying back the stock over time. By lowering the share count by 2 or 3% annually, an organisation cold increase shareholder return through a comparable amount annually.

Question 3: Price Earnings (PE) ratios From the notes, the price earnings ratios are identified as the organisation share price to the organisation earnings per share. This ratio is….

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