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Review: Saving & Investing (Part 1)Lending Investments
◦Checking Accounts◦Certificate of Deposits◦Bonds
Ownership Investments◦Real Estate◦Stocks◦Mutual Funds/ETF’s
Review: Saving & Investing (Part 1)Explain the relationship of
Risk/Reward. Explain why the relationship is this way.
Review: Saving & Investing (Part 1)Inflation
Good Market =◦Bull Market
Bad Market =◦Bear Market
Investing in StocksPersonal Finance
ObjectivesUnderstand the stock market's
function for both owners and investors
Understand what drives prices up and down
Recognize and apply the concepts of◦Earnings Per Share (EPS)◦Price/Earnings Ratio (P/E) ◦Factoring growth in the valuation of a
company
Meet VelmaVelma owns a small
cupcake shop
Velma makes a profit of $5,000 a year
Business is growing, but she needs cash to expand
Velma’s OptionsLoan from a Bank
Issue Bonds◦Borrow from
Investors
Find Private Investors
Find Public Investors
Velma and DaphneVelma needs to
borrow moneyDaphne has money
to lend
Velma and DaphneVelma Gets a Loan
from a Bank
Pays 7% Business Loan
Daphne Puts Her Money in Checking Account or CD
Earns 1%-3% in Interest
7% 2%
Velma and DaphneVelma Issue
Bonds
Pays 6% to Investors
Daphne Invests in a Bond
Receives 6% Interest
Velma and DaphneVelma seeks
private investors
FamilyFriendsBusiness People
Daphne wants to buy 50% of the company
Velma’s Company makes $5,000 a year
Daphne wants half the profit ($2,500)
How Much Should Daphne Pay?
If Daphne wants 50% of the business, how much should she pay Velma?
What is Velma’s business worth?
Issuing Stock- Going Public
Allows public to invest in Velma’s company
Issue shares to investors
Profits are shared among investors
Public vs Private
Private Public
Does not need to disclose◦ Revenue
◦ Profits
◦ Expenses
◦ Salary
Kwik TripMenardsFestival
Need to disclose◦ Revenue
◦ Profits
◦ Expenses
◦ Salary
BPHome DepotPublix
What is the Stock Market?Just like a farmer’s
market
Buy and sell shares of stock in public companies
Companies recognized by Ticker Symbols◦SBUX WMT◦MCD MSFT
Benefits of the Stock MarketOwners Raise
Money
Investors become Owners
Allows businesses to grow and expand
Why Go PublicVelma’s
business has grown to 10 stores
Wishes to expand to 200 stores
Needs to raise money to expand
Velma’s CupcakesValue determined
by Wall Street
Issues 500,000 shares at $5/share
Raises $2.5 million to expand her business
Ticker Symbol: VCUP
What causes the price to change?
After six months:
Demand for Cupcakes is High
Sales are GrowingProfits are Rising
VCUP Price:$8.00
What causes the Price to Change?
After 12 Months:
Demand for Cupcakes is Low
Economy is BadSales are
SlowingProfits are Falling
VCUP Price$3.00
What causes the Price to Change?
Supply and Demand
High Demand-Low Supply- Price Rises
Low Demand-High Supply- Price Falls
Total ProfitQuarter1 $200,000Quarter 2 $350,000Quarter 3 $150,000Quarter 4 $300,000Total Profit $1,000,000Number of Shares
500,000
Earnings Per Share
Quarter Profit Shares EPS
Quarter 1 $200,000 500,000 $.40
Quarter 2 $350,000 500,000 $.70
Quarter 3 $150,000 500,000 $.30
Quarter 4 $300,000 500,000 $.60
Year 1 $1,000,000
500,000 $2.00
Earnings Per Share
EPS = Net Income (Profit) Shares
Quarter 1: $200,000 = $0.40500,000
Profit Equation Total Revenue-Total ExpensesTotal Profit
Velma’s Cupcake Revenue$3,000,000
Velma’s Cupcake Expense$2,000,000
Velma’s Cupcake Profit$1,000,000
What’s a Fair Price?Is $8.00
Expensive for VCUP
Is $3.00 Cheap for VCUP
We don’t know until we look at the P/E Ratio
Price to Earnings RatioPrice - Current Share
Price
Earnings - Earnings Per Share
VCUP Price- $8.00EPS- $2.00Price/Earning= $8/$2P/E 4
Price to Earnings RatioNot represented in
dollars
Lower the better
High numbers mean a stock could be expensive
Look at Competitors
Price to EarningsStock Price EPSPEP $100 $5.00KO $100 $6.66
P/E Ratio = Market Value per Share Earnings per Share (EPS)
Pepsi P/E 100/$5.00=Coke P/E 100/$6.66=
2015
P/E Ratio:
Pepsi P/E 100/$5.00=20
Coke P/E 100/$6.66= 15
Which has the better P/E ratio?
Coke is a better value because the P/E ratio is lower
Ways to Profit from Stock
Capital GainBuy 1,000 Shares of MSFT @ $20Sell 1,000 Shares of MSFT @ $35
$20 (buy)$35 (sell)$15 (profit per share)
Profit: 1,000 x $15 = $15,000Buy LOW sell HIGH
Ways to Profit from Stock
DividendsYou own 200 Shares of Nike. Nike pays a dividend of $3/share.Profit: 200 x $3 = $600
Dividends are paid by the company to you for owning shares in the company. Dividends are paid differently based on the company. No profit = No dividend
Calculations P/E Ratio = Market Value per Share
Earnings per Share (EPS)
EPS = Net Income (Profit) Shares
EPS = Net Income (Profit) - dividends Shares
Profit = Total Revenue-Total Expenses Total Profit
Question 1Jerry's Juice Company has 500,000 shares
outstanding Listed below are the quarterly EPS for the
company.Q1 $.60Q2 $.40Q3 $.75Q4 $.25
EPS = Net Income (Profit) Shares
500,000/.60 =$300,000500,000/.40 =$200,000500,000/.75 =$375,000500,000/.25 =$125,000
Question 1Jerry's Juice Company has 500,000 shares
outstanding Listed below are the quarterly EPS for the company.Q1 $.60Q2 $.40Q3 $.75Q4 $.25
What are the total earnings for the past year? A. $125,000B. $1,000,000 C. $2.00 D. $250,000
Question 2All other things being equal, it is
best to look for a company with a low P/E.
TrueFalse
Question 3Company A has a lower PE than
company B. Company B has a higher EPS than company A.
Which choice below represents the best thinking?◦A. Company A is a better investment due to
its lower PE◦B. Company B is a better investment due to
its higher EPS◦C. This information does not allow for a
meaningful comparison
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