Question

If a corporate company has a projected net return after taxes of $60.00 per share and prevailing interest rates are 5% annual, what simple process would determine the current stock price per share? Calculate that value.What would happen to the value you just calculated if prevailing interest rates rise substantially?What would happen to the value you just calculated if net return expectations were suddenly expected to decline substantially?

Answer 1

The process of discounting of the projected after tax earning per share would determine the current stock price. It is also called as present value method.

Share price = After tax earning per share / Rate

Share price = 60 / 5%

Share price = 1200

If the prevailing interest rates rises substantially then the share price will go down as discounting rate increases the present value of cash flow decreases.

If the net return expectation were suddenly expected to decline substantially then share price will go down as the cash flow decreases present value also decreases.