Final answer:
The price of a share is the present value of the future earnings per share, which can be calculated using the present discounted value (PDV) formula. Applying the PDV formula to the expected future earnings per share, you can determine the appropriate price per share.
Step-by-step explanation:
The concept being discussed in this question is the present discounted value (PDV) and its application to stocks. According to economists, the price of a share is the present value of the future earnings per share. In other words, it is the amount you should be willing to pay in the present for a stream of expected future payments.
To calculate the price per share, you need to calculate the present value of the future earnings per share using an interest rate. The present discounted value (PDV) formula calculates the worth of an amount in the future, in terms of the present, given the interest rate. By applying the PDV formula to the expected future earnings per share and summing up the present values for different time periods, you can determine the appropriate price per share.
Once you have the PDV of the total profits, you divide it by the number of shares to get the price per share. For example, if the PDV of total profits is $51.3 million and there are 200 shares, the price per share would be $256,500.