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.
1. 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.
2. 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.
3. Add the stock price to this value. For example, if the stock sells at $25 per share, add $4 to $25 to get $29.
4. 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.
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