Same idea to value securities

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Reference no: EM132691987

Question 1.

Harry, a friend of yours, is taking a course in economics, and has become confused by some of the terminology because of the way people commonly use the same words. The economics professor says investment occurs when companies buy equipment and build factories. Yet Harry has always heard people talk about investing as a method of saving when they put money in the bank or purchase securities. He's confused by these dissimilar uses of the word, and has asked you to explain. After asking for your help, Harry happily states that there's one thing he does understand perfectly about what the econ prof says, and that is "savings equals investment." Since investing in stocks and bonds is also saving money, it's obvious that savings equals investment!

Write a brief explanation to help Harry out.

Question 2.

A business can be valued by capitalizing its earnings stream (see example 6.15 in textbook).

lasher, w. r. (2013). practical financial management, 7th ed, cengage publishing

How might you use the same idea to value securities, especially the stock of large publicly held companies?

Is there a way to calculate a value that could be compared to the stock's market price that would tell an investor whether it's a good buy? (If the market price is lower than the calculated value, the stock is a bargain.)

What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share etc.

Does one measure make more sense than the others?

What factors would make a stock worth more or less than your calculated value?

Reference no: EM132691987

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