price of the share. The average of the past fixed period of earning per share shall not be
below the current earnings dividend per share. Again, there must be a higher gap
between the market price of a share and the current earnings of dividend per share. Any
analysis based on perfect stock exchange market may not be realistic. This is because
perfect stock exchange is based on the assumptions that information is perfect and timely,
that customers are rational, and that there are no manipulations, etc.
Assessing the future profitability of a firm is one of key factors to estimate the expected
return to shareholder.
The investor is advised to always look into the historical data of the company under
selected indicators. He should collect and analyze the market trends of shares, and list out
the strengths and weakness of the company. He should concentrate on and analyze the
circumstances under which movement of price have taken place. He should try to
anticipate situations that may repeat in the future. He should identify the impact of
changed policies at different levels, as well as the realities of competition and the effect
of changing technologies on the company's performance. In short the investor must
examine the company's activities from all sides by considering all factors.
Bonus Issue
A firm may provide a ‘bonus issue’ by transferring surplus reserves (retained profits) to
share capital by book adjustment. Such a ‘bonus issue’ will cause a rise in the number of
shares and reduction in Dividend Per Share.
One of the major reasons for issuing ‘bonus issue’ is to reduce the extremely hiked
market price of a Share and to enable the people to purchase shares and thereby enlarge
the share capital base.
Rights Issues
Whenever fresh shares are issued, the existing shareholders have a right to subscribe to
new shares in proportion to their existing share holdings. Convertible debenture holders
also have a similar right. Such rights of existing holders are known as ‘rights issue’.
Cum-Rights Price
The ‘cum-rights price’ means the price of the security before the ‘right-issue’ is known.
Ex-rights price:
The ‘ex-rights price’ means the price after the ‘rights issue’.