Personal Finance 1st Edition by Jack R. Kapoor

Exercise 17

1. Explain the relationship between earnings and a stock’s market value.

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2. Why are earnings per share and price-earnings calculations important?

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3. What are the formulas for dividend payout, dividend yield, total return, annualized holding period yield, book value, and market-to-book ratio?

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4. Do you think fundamental analysis, technical analysis, or the efficient market hypothesis best describes price movements for the stock market? Why?

Action Application Use Internet research to find the close price, earnings per share, and dividend amount for the stocks listed below. Then calculate the PE ratio and dividend yield.

Step 1 of 4

1. Many analysts believe that a corporation’s ability and inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. Simply put, higher earnings generally equate to higher stock value. Unfortunately, the reverse is also true. If a corporation's earnings decline, generally the stock’s value will also decline. (p. 473)