4.4.3 Stock

Stock price is driven by book value, the last two years’ earnings per share (EPS) and the last two years’ annual dividend.

Book value is equity divided by shares outstanding. Equity equals the common stock and retained earnings values listed on the balance sheet. Shares outstanding is the number of shares that have been issued. For example, if equity is $50,000,000 and there are 2,000,000 shares outstanding, book value is $25.00 per share.

EPS is calculated by dividing net profit by shares outstanding.

The dividend is the amount of money paid per share to stockholders each year. Stockholders do not respond to dividends beyond the EPS; they consider them unsustainable. For example, if your EPS is $1.50 per share and your dividend is $2.00 per share, stockholders would ignore anything above $1.50 per share as a driver of stock price. In general, dividends have little effect upon stock price. However, Capstone is unlike the real world in one important aspect– there are no external investment opportunities. If you cannot use profits to grow the company, idle assets will accumulate. Capstone is designed such that in later rounds your company is likely to become a cash cow, spinning off excess cash. How you manage that spin off is an important consideration in the end game and dividends are an important tool at your disposal.

Your company cannot issue stock.

You can retire stock. The amount cannot exceed the lesser of either:

• 5% of your outstanding shares, listed on page 2 of last year’s Courier; or
• Your total equity listed on page 3 of last year’s Courier.

You are charged a 1.5% brokerage fee to retire stock.