Investment analysis of the common stocks of selected California banks. - Page 144 |
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CHAPTER V II
INVESTMENT MULTIPLIER
One o f t h e m o st i m p o r t a n t i n v e s t m e n t d e c i s i o n s
t h a t t h e b an k s t o c k i n v e s t o r m ust make i s t h e d e t e r m i n a t
i o n o f a r e a s o n a b l e p r i c e t h a t he s h o u ld p a y f o r a bank
s t o e k . T r a d i t i o n a l l y , t h e m a rk e t p r i c e h a s b e e n r e l a t e d
t o e a r n i n g s by t h e p r i c e - e a r n i n g s r a t i o , w h ich i s t h e
q u o t i e n t fo u n d b y d i v i d i n g t h e m a rk e t p r i c e by t h e p e r
s h a r e e a r n i n g s . I n a t t e m p t i n g t o c o n v e r t e s t i m a t e d
f u t u r e e a r n i n g s and d i v i d e n d s i n t o v a l u e , t h e r e c i p r o c a l
i
o f t h e p r i c e - e a r n i n g s r a t i o i s so m etim es u s e d a s a
c a p i t a l i z a t i o n r a t e t o c a p i t a l i z e e s t i m a t e d f u t u r e e a r n -
i|
i n g s i n t o v a lu e * R a t h e r t h a n c a p i t a l i z e e s t i m a t e d f u t u r e
i ^
j e a r n i n g s p e r s e t o o b t a i n v a l u e , a f a c t o r i s u s e d , n o t
! u n l i k e a p r i c e - e a r n i n g s r a t i o , w h ic h i s c a l l e d a m u l t i -
ii
p l i e r * The i n v e s tm e n t m u l t i p l i e r i s a r e l a t i o n s h i p
!I b e tw e e n e a r n i n g s and i n v e s t m e n t v a l u e and i n d i c a t e s how
much a n i n v e s t o r i s w i l l i n g t o p a y f o r e a c h d o l l a r o f
f u t u r e e s t i m a t e d e a r n i n g s . The m u l t i p l i e r i s i m p o r t a n t
j i n e s t i m a t i n g v a l u e , an d t h e i n v e s t o r s h o u ld exam ine t h e
| p r i n c i p a l e l e m e n t s w h ich go t o d e te r m in e w h at m u l t i p l i e r
• s h o u ld be u se d * Some o f t h e s e e l e m e n ts a r e : (1 ) p r i c e -
1 e a r n i n g s r a t i o s , (2 ) s t a b i l i t y o f t h e b a n k , (3) p r o s p e c t
i v e g ro w th o f t h e b a n k , and (4 ) d i v i d e n d p a y - o u t r a t i o s *
Object Description
Description
| Title | Investment analysis of the common stocks of selected California banks. - Page 144 |
| Repository email | cisadmin@lib.usc.edu |
| Full text | CHAPTER V II INVESTMENT MULTIPLIER One o f t h e m o st i m p o r t a n t i n v e s t m e n t d e c i s i o n s t h a t t h e b an k s t o c k i n v e s t o r m ust make i s t h e d e t e r m i n a t i o n o f a r e a s o n a b l e p r i c e t h a t he s h o u ld p a y f o r a bank s t o e k . T r a d i t i o n a l l y , t h e m a rk e t p r i c e h a s b e e n r e l a t e d t o e a r n i n g s by t h e p r i c e - e a r n i n g s r a t i o , w h ich i s t h e q u o t i e n t fo u n d b y d i v i d i n g t h e m a rk e t p r i c e by t h e p e r s h a r e e a r n i n g s . I n a t t e m p t i n g t o c o n v e r t e s t i m a t e d f u t u r e e a r n i n g s and d i v i d e n d s i n t o v a l u e , t h e r e c i p r o c a l i o f t h e p r i c e - e a r n i n g s r a t i o i s so m etim es u s e d a s a c a p i t a l i z a t i o n r a t e t o c a p i t a l i z e e s t i m a t e d f u t u r e e a r n - i| i n g s i n t o v a lu e * R a t h e r t h a n c a p i t a l i z e e s t i m a t e d f u t u r e i ^ j e a r n i n g s p e r s e t o o b t a i n v a l u e , a f a c t o r i s u s e d , n o t ! u n l i k e a p r i c e - e a r n i n g s r a t i o , w h ic h i s c a l l e d a m u l t i - ii p l i e r * The i n v e s tm e n t m u l t i p l i e r i s a r e l a t i o n s h i p !I b e tw e e n e a r n i n g s and i n v e s t m e n t v a l u e and i n d i c a t e s how much a n i n v e s t o r i s w i l l i n g t o p a y f o r e a c h d o l l a r o f f u t u r e e s t i m a t e d e a r n i n g s . The m u l t i p l i e r i s i m p o r t a n t j i n e s t i m a t i n g v a l u e , an d t h e i n v e s t o r s h o u ld exam ine t h e | p r i n c i p a l e l e m e n t s w h ich go t o d e te r m in e w h at m u l t i p l i e r • s h o u ld be u se d * Some o f t h e s e e l e m e n ts a r e : (1 ) p r i c e - 1 e a r n i n g s r a t i o s , (2 ) s t a b i l i t y o f t h e b a n k , (3) p r o s p e c t i v e g ro w th o f t h e b a n k , and (4 ) d i v i d e n d p a y - o u t r a t i o s * |
