Topic: Several factors, both internal and external, impact a company’s stock price, and the subsequent perceived valuation of a company. Sometimes that perceived value matches that of the financial statements, and other times it is vastly different. Therefore, discuss the factors that lead to a valuation of a company’s worth compared to that of the financial statements, and how company executives create the most value for all stakeholders.
The perceived valuation of a company is often reflected in the company stock price which is affected by many factors both internal and external in nature. The motivations to establish the value of a company can be born out of the desire to create profit from trading, the need to better manage and understand companies, the need to develop effective economic policies and the desire to communicate simplified accurate information to the public (Hoover, 2006). According to Brealey, Myers, and Marcus (2009), investors set the value of public corporations in financial markets where shareholder value is determined by the number of shares and the outstanding market price (Brealey, Myers, & Marcus, 2009).
Momani and Alsharari (2012), assert that financial theory shows the following external macroeconomic factors affect stock returns are “the spread between long and short interest rates, expected and unexpected inflation, industrial production, and the spread between high- and low-grade bonds” (p. 152). These factors are important because they affect the financing and thus influence the opportunities each firm may consider which in turn affect their stock price. The financial statements are prepared according to conform to the standards imposed by the governing bodies respectfully, the GAAP and IRS. These statements although created internally are external in nature since they are prepared with an accrural-based accounting methodology (Brealey, Myers, & Marcus, 2009).
According to Hoover (2006), the financial statements can help...