Week 1 Stock Prices

Stock Prices

Remember, the wealth of a corporation's owners is measured by how much their stock is worth.

Therefore, things that influence the price of the firm's stock are of vital importance to a firm's managers.

What are some broad factors that influence stock prices?

• Expected EPS
  This is profits per share. Obviously, more is better and less is worse (all other things being equal). Owners can get more profits per share by making more money or by decreasing the number of shares outstanding.
  
  
• Timing of Cash Flows
  Sooner is better and later is worse. However, a big cash flow later may be better than a small one up front, as we shall see later in the course.
  
  
• Risk
  The possibility of not getting expected cash flows or of having to pay them to someone else is a big factor. Besides the plain riskiness of the business the firm is in risk enters the picture in terms of the amount of money the firm borrows.