Suppose the stock of company B has been trading at 1000. Unexpectedly, its earnings this period are reported as 96. Market interest rate i = .08
If you believe that its earnings will remain at 96 indefinitely, what should the share price be?
If you believe this is a once-only increase, so that earnings will revert to whatever they were before, what should its share price be in the future?
You have been watching as the price of a company's stock has risen on consecutive past days from 200 to 210 to 220.5 and then 231.5, where it is today.
You have an opportunity to buy this stock tomorrow for 250, but you have to decide today.
You apply a simple extrapolation model to determine whether you should commit now to that future purchase. Should you?
Suppose instead the opportunity is to buy the stock for 250 two days from now, rather than tomorrow. Should you commit to do that ?