Modern Investment Theory - Report Example

Modern Investment Theory Part I Menomonie issuing 15% Stock Dividend When a stock dividend is declared, it is expressed as percentage. 15% stock dividend indicates that for every 100 shares a shareholder owns, he will receive 15 shares when the dividend is distributed. As the total outstanding shares of Menomonie are 1,200,000, 15% dividend would add 180,000 ((1200000/100)*15) shares to total outstanding shares, and thus outstanding shares would be increased to1,380,000 share upon distribution of stock dividend. In this case both number as well as total value of shares issued and outstanding would increase. Menmonies issuing 4 for 3 Stock Split When a stock split is announced, it is usually expressed in the form of a ratio, like Menmonies issuing 4 for 3 stock split. That means a stock holder will end up with 4 shares for every 3 shares of stock previously held. As a result, the total par or stated value of shares issued and outstanding will remain the same, but the total number shares issued and outstanding will increase. Thus the company having 1200000 number of shares issued and outstanding before the split would end up with 1600000 (i.e. 1200000*4/3 ) number of shares as issued and outstanding after the split, but the value of shares par or stated value would remain the same. Menmonies reversing 3 for 1 stock split Reversing 3 for 1 stock split implies that a stock holder having 3shares will end up with one share after the split. Thus the number of issued and outstanding shares would get reduced, though the par or stated value of outstanding shared would remain the same. Before split Menmonies was having 1200000 as issued and outstanding shares, after the split the number of shares would get reduced to 400000 shares (i.e., 1200000*1/3) as issued and outstanding shares. But total value in the balance sheet of Menmonies would remain the same as before the split. Return on equity Return on equity is ratio that measures the return earned on the common stockholders’ investment in the company. Return on common equity is calculated as under: Earning available for common stockholders Return on Equity (ROE) = ----------------------------------------------------------- Common Stock Substituting the values as provided in Hudson Homes and Baldwin Construction, we get the following results to analyze: The above calculation reveals that at $ 1000000 earning and 11.1% of ROE, Hudson Homes has outstanding equity of $9009009. On the other hand at $1000000 as earnings and 20% of ROE, the Baldwin constructions would have $5000000 as outstanding value of equity. Part Two Perfect stock market is an illusion. Perfect stock market indicates market without arbitrage, that is where there are no fluctuations of prices except as determined by perfected demand and supply forces. When there is no attraction of fluctuations of prices inducing some speculations, then even in pure investors’ initiations, analysts will have a very little role or no role to play. Perfection or no perfection, an analyst will assess the market as it exists. But who will be the takers of his assessment. Under perfect markets forces are auto correctors. There are no roles for indirect forces to put up resistant against the prices settled under perfect system. Any deviation is bound to be corrected as soon deviation hits the market. Imperfection is the basic attraction and charm of stock markets. In fact the term ‘profit’ will have no meaning if it is evenly distributed among investors. Investors will never think of acting as speculators. When speculation is not there, forward trading and insider trading will not have a role. For whom then an analysis is required. Game theorists call the stock market a “positive sum game”. This is so because imperfection is the basic characteristics of stock markets. In the long run market rises, and all investors think of making money. Here comes the role of analysts. They analyze market for short time speculators as well as for long term investors, and are accordingly remunerated. Under perfection they will analyze the market but will never be remunerated, as then they would be analyzing the simple equations of perfection, and not the complications of imperfections. Part Three The company chosen is Wall-Mart Stores Inc. 1. The following financial information is available with regard to company: The entire information has been subdivided under headings titled Summary, Charts, News & Info, Company, Analyst Coverage, Ownership, and Financials. Summary contains information about call and put options, and historical prices of stocks of the company. For seeking historical prices one has to set range of dates. Charts: Three types of charts are available, namely interactive, basic charts, and basic charts analysis. Interactive charts are manipulative to get a variety of information relating to stocks, stock splits, and dividends. Basic charts give all that information as also provided by interactive, but have less manipulative control. Chart analysis is the basic controls whereby the information in charts can be changes say as per range, type, moving average, EMA, and other indicators. News & Info.: This section provides all news about Wall mart stocks under subheadings, headlines, financial blogs, company events, and message board. Company: First the profile of then company contains addresses, website address, business summary, and company related information. The section Key Statistics contains all statistics with regard to valuation measures, financial of the company, trading information, share statistics, and dividend and splits. SEC sections contain all filings of the company with regard to 8-K, quarterly 10Q, and yearly annual report in 10K. This is massive data and complete information about these returns can be downloaded. Competitor sector contains all comparative information of competitors of Wall Mart with regard to Market Cap, Employees, Revenue, and Gross Margins among other information. The information about industry in which Wall Mart is operating is also there. In last in this section information about indices of stock exchanges where Wall Mart is included is provided. It is certainly a great wealth of information. Section Analyst Coverage contains analyst estimates, research reports, and star analysts. Ownership section is full of details about major shareholders, insider transactions, and insider roaster. In the last section Financials year wise as well as quarter wise data of Income statement, Balance sheet, and Cash flow statement is provided. 2. Financial provide complete year wise details about Income Statement, Balance Sheet, and Cash flow statement. The company’s performance is reflected from these financials, and this has direct bearing in the book value as well as market value of stocks of the company. The investor can evaluate the share price on basis of such financial information and compare it with the prevailing price in the market, as well the trend in the industry. Investors get a trend of financial results over a period of time, and that determine the estimated idea about company’s profitability and financial status in future. This has great impact on stock prices of the company. The investor can calculate Price/ earning ratio of the stock, which is based on Earning per share of the company. The financial of the company provide information about earnings and total equity of the company. Based on this information, an investor can calculate number of equity shares outstanding on a particular date and thereby EPS can be calculated. EPS is further handy in arriving at price earning ratio. The formula is to divide market price on a particular date by earning per share on that date. That means information provided under the heads Financial and Quotes are helpful in finding P/E ratio. 3. Price/Earnings (P/E) Ratio is used to assess for the appraisal of share value of the investor’s holdings. In fact P/E ratio indicates the amount the investors are willing to pay for each dollar of firm’s earnings. The level of this ratio is an indication of the degree of confidence that the investor has in the future performance of the company. The higher the ratio, the more confidence the investor places in company’s future performance. P/E ratio of Wall Mart stores Inc. on the date of this write up is 18 calculated as price of $56.27 divided by EPS of $3.13. P/E ratio for Discount, Variety Stores industry under which Wall Mart Stores Inc. falls is on that day is 106.33 for the leader “99 Cents Only Stores (NDN) . There are 13 players in the industry and Wall Mart Inc. (WMT) rank is 6th out of total 13. Read More