Stock Prices Change And Earnings Changes Essay Example | Topics and Well Written Essays - 1500 words

Stock Prices Change And eitherowance Changes - Essay ExampleForecasted free money flows (operating profit + depreciation + amortization of goodwill - capital expenditures - cash taxes - change in working capital) argon discounted to a present valuate using the companys weighted median(a) costs of capital. DCF analysis shows that changes in long-term growth rates have the greatest impact on carry on valuation. Investors can also use the DCF model as a reality check. Instead of exhausting to come up with a target share price, they can plug in the current share price and, be working backward, calculate how fast the company would need to grow to justify the valuation. The set ab tabu the implied growth rate, the better - less growth has therefore already been priced into the stockThe dividend discount model is a more conservative variation of discounted cash flows, that says a share of stock is worth the present value of its future dividends, rather than its earnings. The dividen d discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in theory, it applies to all cases since even retained earnings should eventually turn into dividends. Thats because once a company reaches its mature degree it wont need to reinvest in its growth, so management can begin distributing cash to the shareholders. (Plan B would be for the chief executive officer to pursue some insane acquisition, just to gratify his bloated ego.) As Williams puts it,If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later if not, then they are money lost... In short, a stock is worth only what you can get out of it.We mostly find earnings developed in three Anglo-Saxon countrieswhere capital is traditionally raised in public markets and reporting rules are unencumbered by taxation requirementsto have greater explanatory agency for stock returns th an cash flow metrics.