Influences on Share Prices Term Paper

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Finance

Stock Valuation Questions

The market price for a stock or a bond may be influenced by both positive and negative risks. Using the example of Apple it is possible to consider two potential risks.

Risk

Apple Inc. is well-known for its aggressive defense of its patents; the best known cases are between Apple and Samsung with cases in more than 50 cases across multiple countries at one point in 2012 (Mueller, 2012). Apple and Samsung both had victories and defeats which were aggressively fought. These battles show how important development and ownership of a patient can be, with firms seeking to protect their intellectual property. A potential threat may emerge if Apple faced a claim of credible claim of patent breach from another major supplier for a core product, where stockholders may fear that the firm may be liable for a potentially large settle and/or withdraw the offending products from relevant markets. The potential of a major claim which could impact on profits may drive down the share price.

Risk 2

Another risk that could impact on the share price of Apple could be the development of disruptive technology which may threaten the market position of Apple. A major change in technology that is attractive to the market may attract consumers away from Apple to the new firms' products, which may impact on sales in the short-term. In the longer term the firm may have a significant lag as they may need to undertake significant investment in research and development to catch up. The fall in profits ad the danger that is posed due to the firm need to make large investment to catch up may be a deterrent to potential investors and drive down prices.

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Question 1 (b)

If interest rates rise, this could impact on bond and share prices. If interest rates rise then returns on money in deposit accounts and new bonds issued will receive a higher rate. This will raise the risk free rate so the expected rate of return which is the risk free rate plus the risk premium will increase. To increase the level of return, as the rate of return cannot simply be increased, the price of the shares or the bonds may fall to the return expected or forecast, is more in line with the new market conditions.

Question 1(c)

If the gross domestic product (GDP) were negative, this would mean production was shrinking and the economy was contracting, and could even be in a recession. During these types of occasions there may be less demand for shares as there is less disposable income which may negatively impact on the share value. Likewise, the outlook for the firm may change, for example in a recession they may be expected to earn less which may impact on their expected results; as the value of a firm is often believed to reflect their expected….....

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