2. 2 Discussion Analysts expect a company’s profits to be $2.0 billion Their previous highest profit was $1.5 billion The company announces record profits of $1.9 billion They will pay a record dividend of $1.90 per share The share price goes down on the announcement How can this be possible/reasonable?
3. 3 What are shares? Part ownership of a company and it’s assets If you own 10% of the shares then you are entitled to: 10% of voting power on who is on the board of directors 10% of voting power on other important issues 10% of all profits distributed as “dividends” 10% of assets if Telstra was “wound up” Buying shares is like “going into business” You should know the company intimiately
4. 4 How much is a share worth? You make money with shares from two sources: Receiving company profits paid out to investors as “dividends” Share price going up (and then selling at a higher price) The value of any financial asset is determined by how much you are willing to pay for all future cash flows The value of a share is determined by future dividends and the risk associated with those dividends Future share prices are determined by subsequent dividends so to argue that price is determined by future dividends and expected future prices is circular
5. 5 Share price goes up when people’s expectations of dividends improves It may also go up in the short-term due to supply and demand factors Companies that are not currently profitable can still be worth something because: There is a chance they will be profitable in the future They may be taken over by another firm that can make profit Assume that the current share price already reflects all the publicly available information (market efficiency)!
