A stock's value has two components: the stock price, which is the value the investor will receive by selling each share, and the dividends that the stock pays. This latter component relates directly to the net income that the company distributes among its shareholders. The company must state on its earnings statements its earnings per share ratio, which relates the income and dividends. When a company issues more shares, this ratio can drop, which reduces shareholder value.
Subtract the company's preferred dividends, which it has promised to preferred shareholders, from its net income. For example, if a company has a net income of $80,000 one year and must distribute $20,000 of it to preferred shareholders, subtract $20,000 from $80,000 to get $60,000. This is the income available to shareholders.
Divide the income by the total number of outstanding shares. For example, if the company has issued 15,000 shares, divide $60,000 by 15,000, to get $4. This is the value of earnings per share.
Add the stock price to this value. For example, if the stock sells at $25 per share, add $4 to $25 to get $29.
Multiply the earnings per share by the number of shares that the shareholder owns. For example, if the investor owns 20 shares, multiply $29 by $20, to get $580. This is the shareholder value.
References
- Cornerstones of Financial & Managerial Accounting...; Jay S. Rich et. al
- Principles of Accounting; Belverd E. Needles
- Social Security Administration. “What Stock Market Returns to Expect for the Future?” Page 38. Accessed August 18, 2020.
- U.S. Securities and Exchange Commission. “Stocks.” Accessed August 18, 2020.
- American Bar Association. “Does “We the People” Include Corporations?” Accessed August 18, 2020.
- University of Pennsylvania Carey Law School. “THE NATURE OF THE LIABILITY OF SHAREHOLDERS OF A CORPORATION, UNDER STATUTE IMPOSING A LIABILITY ADDITIONAL TO THAT FOR STOCK SUBSCRIBED," Page 586. Accessed August 18, 2020.
- University of Pennsylvania Carey Law School. “INDEPENDENT DIRECTORS AND CONTROLLING SHAREHOLDERS," Pages 1271-1272. Accessed August 18, 2020.
- European Central Bank. “Keynote speech by Marc Bayle de Jessé, Director General Market Infrastructure and Payments, ECB, at the Central Bank Payments Conference, Amsterdam, 27 June 2017,” Page . Accessed August 18, 2020.
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Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.