Question

How do you know if a stock is overvalued? Are retained earnings free? How does the popularity of mutual funds impact rights of shareholders? (500 words..only one question needs to be answered but more than one or all is fine as well)

Answer 1

1)

A stock is considered overvalued when it’s current price is not supported by its price earnings

( P/E) ratio or earnings projections

A company is considered overvalued if it’s trade at a rate that is 50 times it’s earnings

Some of the ways to check if your stock is over valued are

1) price-earnings ratio

2) dividend yield

3) price to sales ratio

4) price to dividend ratio

5) return on equity

2)

Generally, retained earning is considered as cost free source of financing. It is because neither

interest nor dividend is payable on retained profit

however this statement is not true. Shareholders of the company that retains more profit expect

more income in future than the shareholders of the company that pay more dividend and retains

less profit. There fore there is an opportunity cost of retained earning

In other words,retained earnings is not a cost free source of financing