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Market Measures

Market Measures

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Published by ClassOf1.com
The stockholders are the firm’s residual owners and they are interested in the stock’s total return. How well did the CEO perform? What was the stockholders’ total return? The stock’s return does not always track the CEO’s performance, especially in the short run. A company may do well but the stock might go down (e.g., with an interest rate increase).
The stockholders are the firm’s residual owners and they are interested in the stock’s total return. How well did the CEO perform? What was the stockholders’ total return? The stock’s return does not always track the CEO’s performance, especially in the short run. A company may do well but the stock might go down (e.g., with an interest rate increase).

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Published by: ClassOf1.com on Jun 18, 2013
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06/18/2013

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 Accounting
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Sub: Accounting Topic:
 
Accounting Practices
*
Market Measures
The stockholders are the firm’s residual owners
 
and they are interested in the stock’s
total return.How well did the CEO perf 
orm? What was the stockholders’ total return? The stock’s return does not
always track th
e CEO’s performance, especially
in the short run. A company may do well but thestock might go down (e.g., with an interest rate increase). Nevertheless, tying a CE
O’s compensationto the stock’s
market performance is sensible (as long as it is not the only basis of compensationcalculation). There are several comparisons that can be made
. The firm’s performance can be
compared to a defined target return, the return earned by the market, or the returns earned by a setof comparable firms. In addition to relating compensation to the cu
rrent year’s performance, it isreasonable to reward today’s managers in the futu
re for performance for the next ten years. It is
desirable to give today’s managers
an incentive to make decisions with a concern for the future.The
earnings per share
of common stock are widely used in investment analysis. It may be helpful inevaluating the investment worth of a share of stock, and it may also provide an indication of managerial performance. Basically, earnings per share are the ratio of the earnings available tocommon stockholders divided by the average number of common shares outstanding.
Earnings Available to Common ShareholdersEarnings per Share =Average Shares Outstanding
Many companies have relatively complex capital structures, and it is not unusual for these companiesto present several earnings per share in their income statements. Earnings available to commonstockholders generally consist of the net income for the period less any dividends or accumulationsattributable to preferred stockholders. When there are extraordinary items, earnings per share
 
 
Sub: Accounting Topic:
 
Accounting Practices
*
should be calculated on the basis of income before extraordinary items, as well as net income.Companies with complex capital structures generally report two sets of earnings per share figures:primary earnings per share, and fully diluted earnings per share. Both of these sets of figuresmeasure the earnings per share that would have been determined if certain securities had beenconverted and options had been exercised during the period.The
book value per share
is the amount each share would receive if the company were liquidated onthe basis of the historical accounting amounts reported on the balance sheet.
Shareholders’ Equity
 Book Value per Share =Shares Outstanding
The book value per share calculation is straightforward if the company does not have differentclasses of stock. The calculation becomes more complex when different classes of stock exist,
because stockholders’ eq
uity items have to be allocated among the different classes of stock and theamount allocated to each class is then divided by the number of shares outstanding. With regard tothe fact that the balance sheet valuations do not reflect or approximate fair market values, the bookvalue per share figure is not likely to be very useful or meaningful for decision making.

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