27. Market Equilibrium: Stock Markets and Share Prices 1. Data Response Loss-making sportswear retailer JJB Sports has said it is considering whether to ask shareholders for more money as it continues to search for ways to finance the turnaround of its business. It said 'it is reviewing a range of possible options to provide additional capital for the group' including the disposal of further non-core assets, and the possibility of raising more capital with the issue of more shares.’ JJB share price S P1 D Q1 Quantity of shares traded 1.1 Use the diagram above to illustrate what will happen to the share price for JJB if the firm goes through with the proposed share issue. 1.2 In 2007, JJB, the UK’s largest sports retailer at that time, announced pre-tax profits of £38m, up 14% on the previous year. Explain the effect that this positive news will have had on the share price for JJB. Ensure that you explain clearly in your answer the relationship between a firm’s profits and its share price. ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ 2. Give two reasons why individuals would wish to own shares. ______________________________________________________________________________________ ______________________________________________________________________________________ 3. Read the following extract, and explain how a maximum price scheme might be used to reduce the potential damage done by the bursting of stock market bubbles. Examine also the potential drawbacks to such a scheme, and include a diagram in your response. ‘The inescapable implication is that sooner or later, the stock-market boom must end. The bubble must break. How far the stock market will fall cannot be scientifically predicted except to say that in the nature of things the fall must be great enough to destroy the conviction that the stock market is an easy source of gains.’ Source: adapted from ‘When Will the Bubble Burst?’ by George Reisman Share prices S P1 D Q1 Quantity of shares traded ___________________________________________________________________________________ ___________________________________________________________________________________ www.a-zbusinesstraining.com 27. ANSWERS: Market Equilibrium-Stock Markets and Share Prices 1.1 The issuance of new shares by JJB will increase the supply of JJB shares, shifting the supply curve outwards to S1, and causing the share price to fall to P2. JJB share price S S1 P1 P2 D Q1 Q2 Quantity of shares traded 1.2 It is likely that the share price will rise- higher profits made by JJB will mean that dividend payments will be higher for shareholders. Investors may look to purchase JJB shares in the hope that future profits will be as substantial, offering high dividend payments. This will cause demand for JJB shares to rise, and push the share price up. 2. a) Shareholders look for return on their investment, greater than that which they can reciveve from other investment opportunities. b) Desire to play a role in the running of a company (would require substantial investment to accumulate large enough stake to have any significant role). c) Look to profit from increase in value of shares. If individuals can buy shares at a low price, with the expectation that share price will rise, they can sell them at a later date at a higher price, and the difference in prices will represent the profit to the individual. These are known as capital gains. 3. A maximum price imposed on a market is effectively a price ceiling above which prices cannot rise, irrespective of levels of demand and supply. Governments or regulators can impose a maximum price for a number of reasons- it could be to protect consumers, or to reduce price volatility (when combined with minimum prices). The maximum price will have no effect if it is above market price, but comes into existence when market forces threaten to push prices above a pre-determined level. In stock markets, share prices can rise quite rapidly on the back of speculation, creating what is commonly referred to as an ‘asset bubble’. When investors believe that the price can rise no further, they begin to sell their shares rapidly to ensure they profit from their transactions, causing the share price to collapse and causing a loss of confidence amongst remaining shareholders. This is when the bubble is said to have ‘burst’. Governments could intervene and set a price limit on share prices that they cannot rise above. In this manner, they can stop the rapid, often dangerous, inflation of asset prices. Share prices S P1 PMAX D QS Q1 QD Quantity of shares traded www.a-zbusinesstraining.com
© Copyright 2024 ExpyDoc
