Changes in Equilibrium Stock Prices
by MaestriStock prices are not constant—they undergo violent changes at times. For example, on September 17, 2001, the first day of trading after the terrorist attacks of September 11, the Dow Jones average dropped 685 points. This was the largest decline ever in the Dow, but not the largest percentage loss, which was 22.6 percent on October 19, 1987. The Dow has also had some spectacular increases. In fact, its fifth largest increase was 368 points on September 24, 2001, shortly after its largest-ever decline. The Dow’s largest increase ever was 499 points on April 16, 2000, and its largest percentage gain of 15.4 percent occurred on March 15, 1933. At the risk of understatement, the stock market is volatile!
To see how such changes can occur, assume that Stock i is in equilibrium, selling at a price of $27.27. If all expectations were exactly met, during the next year the price would gradually rise to $28.63, or by 5 percent. However, many different events could occur to cause a change in the equilibrium price. To illustrate, consider again the set of inputs used to develop Stock i’s price of $27.27, along with a new set of assumed input variables:
Now give yourself a test: How would the change in each variable, by itself, affect the price, and what is your guess as to the new stock price?
Taken From : Five-Minute MBA – Corporate Finance
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