A different way of determining how much a share of a company’s stock is worth will be the topic on the next “MTSU On the Record” radio program.
You can listen to their conversation via the Soundcloud link above.
Traditionally, the price of a share of stock is determined by dividends and profits. By creating hypothetical portfolios and using statistical information on companies’ cash flow growth, Jansen found that $1 invested in his cash flow growth-based portfolio grew to $15.30 over the sample period while $1 invested in the stock market grew to $9.85.
Jansen suggests that using profits and dividends as the criteria to determine the price of a stock share is rather limiting.
One reason, he says, is that increasingly fewer companies are paying dividends, but profits, or net income, also can be problematic because they don’t necessarily reflect the changing value of money.
“How much a nominal dollar value will actually get you, … how much you can exchange that set amount of cash for in a given time, changes across time,” Jansen says. “So it’s important to for us to adjust for the timing of when cash changes hands so that we can actually reflect the purchasing power of that cash at that time.”
Jansen’s research paper has been accepted for publication in the Journal of Financial Research.
To hear previous “MTSU On the Record” programs, visit the searchable “Audio Clips” archives at www.mtsunews.com.
For more information about the radio program, contact Logue at 615-898-5081 or WMOT-FM at 615-898-2800.