“IN THE NAME OFALLAH, THE MOST

MERCIFUL, THE MOST BENEFICENT”

SUBJECTBUSINESS FINANCE

INSTRUCTOR MR.KHAWAR ALI

TOPICStock price & shareholders wealthIntrinsic value, market price and stock price

PRESENTERAsma yasmin

STOCK PRICE AND SHAREHOLDERS WEALTH

Primary goal of management Reasons to maximize shareholders wealth How can determine shareholders wealth? What is Market Capitalization? How can raise the stock prices?

What is primary goal of management?

Primary goal of management is

shareholders wealth

maximization.

Why management wants to maximize shareholders wealth ?

To attract investments

How we can determine the shareholders wealth?

Shareholders wealth is simply the number of outstanding shares multiply

by the market price per share.

Shareholders wealth=No of outstanding shares× market price per share

Example of General Electric(GE)

Suppose Mr.Ahmad owns 100 shares of GE’s stock and the price is $35. Now we can calculate his wealth in GE.Shareholders wealth=No of outstanding shares× market price per share Mr.Ahmad wealth= 100 × $35 = $3500

What is Market Capitalization?

Market Capitalization is the total dollar market value of all of a company's outstanding shares.

Market Capitalization=No of outstanding shares× market price per share

Example

Suppose a company has 35 million shares outstanding, each with a market value of $100.Market Capitalization=No of outstanding shares× market price per shareMarket Capitalization= $35 ,000,000 × $100Market Capitalization= $3.5 billion

Stock price is determinant of Market Capitalization and shareholders value

Stock price is determinant of Shareholders Value and Market Capitalization so it is very necessary for the company to increase the stock prices.

How can raise the stock prices?

Good profitability ratiosBy increasing demand artificially

INTRINSIC VALUE, MARKET PRICE AND STOCK PRICE

What is Intrinsic Value? What is Market Price? What is Equilibrium? Determination of Intrinsic and stock prices

What is Intrinsic Value?

An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely.

What is Market Price?

The stock value based on perceived but possibly incorrect information as seen by the marginal investors.

What is Equilibrium?

The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock.

Determination of Intrinsic and stock prices.

Example of Enron’s.

2001

Explanation with example.

Investors at the margin might expect GE’s dividend to be $0.80 per share in 2013 and grow at a rate of 6% per year, thereafter and on that basis they might set a price of $35 per share. However, if they had all the available facts, they might conclude that the best dividend estimate is $0.85 with a 7% growth rate, which would lead to a higher price, say, $40 per share. In this example, the actual market price would be $35 versus an intrinsic value of $40, and if the become equal at any point that will be the equilibrium.

Explanation with graph?

THANK YOU

QUESTIONS?