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Unformatted text preview: ent in the company. Any information that would
cause the stock market to change its expectationseither positively or negatively—about the future cash
flows that would be realized from an investment would result in a change in the price of the company's
stock. Thus, if the market perceives the declaration of a stock split as positive new information about the
company's future prospects, as suggested by the quote from The Wall Street Journal, then the market
would be expected to use this information and increase the price of the company's stock. ID12–12
a. b. When a stock price is discussed in terms of a multiple of earnings, say 45 times, it simply means that the
market price per share is 45 times the size of the earnings per share. Or, every penny of earnings is
currently valued by the market at 45 cents. This “multiple” is often cited as a basis for how over or
underpriced a stock is by the market. When stock markets highly value a stock, its multiple will be very
high (say 45 times), but when markets turn cold to a stock, that multiple drops, meaning every penny...
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