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Article: Do the Maths.(share price premium)(Brief article)
- Article from:
- Accountancy Age
- Article date:
- March 30, 2006
CopyrightCOPYRIGHT 2006 Incisive Media, published with the permission of Incisive Media. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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DO the maths
Reduced earnings volatility should increase value, and we know investors favour low profit volatility. A two year study of 1,000 UK companies over a 33-year period shows that the difference between the top and bottom quintiles of profit stability is a 25% to 30% share price premium for the most stable quintile.
Managers can use option theory to evaluate their plans for reducing future profit volatility. They can also estimate how reducing profit volatility might help their share price, either by looking at the sensitivity of share premiums from moving to a lower quintile of volatility, or by estimating the transfer of value from option ...