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. Is it possible for the estimated value of a common stock to decline if sales...

. Is it possible for the estimated value of a common stock to decline if sales growth is increasing but the

      operating profitability ratio and the capital requirements ratio both remain the same?

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Answer #1

Yes, it is possible. Because the estimated value of the stock depends not just on the profitability,sales and capital requirement factors It also depends on the dividend payouts and the future earnings and dividends grwoth.

The value of the stock is calculated by formula=Dividend in next year/(cost of equity capital-growth rate of dividends)

Out of the earnings a comapny make, how is paid to the shareholders and how is retained by the company for the future growth.

If the growth rate is high, the denominator becomes less and numarator becomes high which results in increase in the estimated stock price. If growth rate is low, estimated stock price decreases assuming the profitability and cpital requirement remains same

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