There are two sources of equity returns: fundamental and speculative. Fundamental returns come from earnings and dividends. Speculative returns arise from changes in the market's valuation of a company's performance and profitability prospects. A company's stock price is determined by multiplying its earnings per share by its price-to-earnings ratio. The total return from holding a stock is the sum of the fundamental return from earnings and any return from expansion or contraction of the price-to-earnings multiple assigned by the market.

1. SOURCES OF RETURNS FROM
EQUITY

2. Two Sources of Equity Returns:
 Fundamental
 Speculative

3. Fundamental:
The Fundamental element concerns the
earnings behind the enterprise along with the
dividend paid out during the holding period.

4. Speculative
The Fundamental element concerns the
changes in the appraisal of the current
performance and prospective profitability by
the market participants.

5. Hypothetical Study: Growth in Earnings
Company Name: ABC Ltd.,
EPS: Rs.12
PE Ratio: 20
Stock Price: Rs.240

6. What is a P/E Ratio?
The Price to earnings (P/E) multiple or ratio is probably
the most popular indicator used by investors for
valuing stocks.
It is the number of times investors must pay for the
company’s current earnings.
For Example, assume that the share price of a company is Rs.80.
if its EPS is, says Rs.5, its P/E is 16. So investors are willing to pay
16 times for every rupee of the company’s earnings
P/E ratio to figure out if a company’s stock is CHEAP or
EXPENSIVE, you can compare one to another Company

7. P/E Ratio:
Stable PE Ratio
PE Ratio Expansion
PE Ratio Contraction

8. Stable P/E Ratio:
Fundamental - 20%
Speculative - Nil
Total Return - 20%
EPS: Rs.12 ; PE Ratio: 20;
Stock Price: Rs.240

9. P/E Ratio Expansion:
Fundamental - 20%
Speculative - 30%
Total Return - 50%
Speculative: ((EPS at the end of the Year)*(change in
PE Ratio))/ Price Paid
EPS: Rs.12; PE Ratio: 25;
Stock Price: Rs.300

10. P/E Ratio Contraction:
Fundamental - 20%
Speculative - -30%
Total Return - -10%
Speculative: ((EPS at the end of the Year)*(change in
PE Ratio))/ Price Paid
EPS: Rs.12; PE Ratio: 15;
Stock Price: Rs.300