Finance What drives stock price?


The simulation uses a simple approach. Stock price is a function of three things:

  • Book value, defined as total equity divided by shares outstanding.
  • Earnings per share (EPS), defined as profits divided by shares outstanding.
  • Dividends per share, set directly by you. Dividends set higher than the year's EPS have no additional benefit to stock price.

Emergency loans also sharply impact the stock price.

Of course, stock prices in the real world are influenced by many other factors. Our goal is to present a simple stock price that you can drive with the decisions at your disposal. Book value reflects the current investment capital, EPS indicates your future earnings potential, and dividends reflect your past performance. To drive your stock price up, increase your profitability and give the profits to the stockholders. Retiring or issuing stock may or may not improve your stock price -- although the number of shares outstanding changes, how you utilize the resulting earnings (to improve profits or pay dividends) has more impact upon stock price than the change in the number of shares.