C4 chapter 7 stock valuation 321 the priceearnings pe

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Unformatted text preview: ). FIGURE 7.3 Stock Quotations Selected stock quotations for March 15, 2002 YTD 52 WEEKS LO % CHG HI STOCK (SYM) YLD VOL DIV % PE 100S LAST NET CHG McDonalds Source: Wall Street Journal, March 18, 2002, p. C4. CHAPTER 7 Stock Valuation 321 The price/earnings (P/E) ratio, labeled “PE,” is next. It is calculated by dividing the closing market price by the firm’s most recent annual earnings per share (EPS). The price/earnings (P/E) ratio, as noted in Chapter 2, measures the amount investors are willing to pay for each dollar of the firm’s earnings. McDonalds’ P/E ratio was 23—the stock was trading at 23 times it earnings. The P/E ratio is believed to reflect investor expectations concerning the firm’s future prospects: Higher P/E ratios reflect investor optimism and confidence; lower P/E ratios reflect investor pessimism and concern. The daily volume, labeled “VOL 100s,” follows the P/E ratio. Here the day’s sales are quoted in lots of 100 shares. The value 59195 for McDonalds indicates that 5,919,500 shares of its common stock were traded on March 15, 2002. The next column, labeled “LAST,” contains the last price at which the stock sold on the given day. The value for McDonalds was $28.72. The final column, “NET CHG,” indicates the change in the closing price from that on the prior trading day. McDonalds closed up $0.57 from March 14, 2002, which means the closing price on that day was $28.15. Similar quotations systems are used for stocks that trade on other exchanges such as the American Stock Exchange (AMEX) and for the over-the-counter (OTC) exchange’s Nasdaq National Market Issues. Also note that when a stock (or bond) issue is not traded on a given day, it generally is not quoted in the financial and business press. Review Questions 7–2 What risks do common stockholders take that other suppliers of longterm capital do not? 7–3 How does a rights offering protect a firm’s stockholders against the dilution of ownership? 7–4 Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares. 7–5 What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? 7–6 What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets? 7–7 Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue? 7–8 What is the difference between a venture capitalist (VC) and an angel capitalist (angel)? 7–9 Into what bodies are institutional VCs most commonly organized? How are their deals structured and priced? 7–10 What general procedures must a private firm go through in order to go public via an initial public offering (IPO)? 7–11 What role does an investment banker play in a public offering? Explain the sequence of events in the issuing of stock. 7–12 Describe the key items of information included in a stock quotatio...
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