78 Part One Value
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GE’s earnings per share (EPS) over the previous 12 months were $1.31 (“ttm” stands for
“trailing 12 months”). The ratio of stock price to EPS (the P/E ratio) was 18.71. Notice that
this P/E ratio uses past EPS. P/E ratios using forecasted EPS are generally more useful. Secu-
rity analysts forecasted an increase in GE’s EPS to 1.67 per share for 2014, which gives a
forward P/E of 14.7.^3
GE paid a cash dividend of $.88 per share per year, so its dividend yield (the ratio of divi-
dend to price) was 3.50%.
Buying stocks is a risky occupation. GE stock traded at just under $29 in 2007. On March 5,
2009, GE closed at $5.58, and the unfortunate investor who bought in at $29 lost 80% of his
investment. Of course, you don’t come across such people at cocktail parties; they either keep
quiet or aren’t invited.
Most of the trading on the NYSE and Nasdaq is in ordinary common stocks, but other
securities are traded also, including preferred shares, which we cover in Chapter 14, and war-
rants, which we cover in Chapter 21. Investors can also choose from hundreds of exchange-
traded funds (ETFs), which are portfolios of stocks that can be bought or sold in a single
trade. With a few exceptions ETFs are not actively managed. Many simply aim to track a
well-known market index such as the Dow Jones Industrial Average or the S&P 500. Others
track specific industries or commodities. (We discuss ETFs more fully in Chapter 14.) You
can also buy shares in closed-end mutual funds^4 that invest in portfolios of securities. These
include country funds, for example, the Mexico and Chile funds, that invest in portfolios of
stocks in specific countries. Unlike ETFs, most closed-end funds are actively managed and
seek to “beat the market.”GE Common stock (NYSE)24.49 0.10(0.41%) Dec 16 4:00PM ESTPrevious close 24.59 Day’s range 24.40–25.18
Open 24.54 52wk range 23.69–28.09
1y target est. 29.17 Volume 48,387,978
Beta 1.19 Avg volume (3m) 33,138,700
Next earnings date 23-Jan-15 Market cap 245.93B
P/E (ttm) 18.71
EPS (ttm) 1.31
Div & yield 0.88 (3.50%)
Source: finance.yahoo.com.(^3) Yahoo! Finance provides extensive information and statistics on traded companies, including summaries of analyst forecasts. For
example, you can click on “Key Statistics” or “Analyst Estimates” under “More on GE.”
(^4) Closed-end mutual funds issue shares that are traded on stock exchanges. Open-end funds are not traded on exchanges. Investors in
open-end funds transact directly with the fund. The fund issues new shares to investors and redeems shares from investors who want
to withdraw money from the fund.
4-2 How Common Stocks Are Valued
Finding the value of GE stock may sound like a simple problem. Each quarter, the company
publishes a balance sheet, which lists the value of the firm’s assets and liabilities. At the end
of September 2014 the book value of all GE’s assets—plant and machinery, inventories of
materials, cash in the bank, and so on—was $650 billion. GE’s liabilities—money that it
owes the banks, taxes that are due to be paid, and the like—amounted to $515 billion. The