Date of Award

5-1973

Document Type

Independent Study

Degree Name

Master of Business Administration (MBA)

Abstract

One of the assumptions that is made in Chapter II of this paper is that the stock market operates without friction. But the market is not frictionless, and this reduces the efficient allocation of capital, which in turn is detrimental to the health of the economy. So, to the extent that friction in capital markets can be reduced, the economy will benefit.

One of the present sources of friction may be due to investors' reluctance to act on the basis of what they know because the tools they have to evaluate their knowledge are limited. The question: "Should high priceearning s ratio stocks earn less than low price-earnings ratio stocks?'' and the limitations of valuation models in answering it, points out one dilemma facing investors because of the limitations of their tools. Such dilemmas can cause confusion and hesitation, and reduce capital market efficiency. It is my wish that the model developed in this paper will ultimately serve to give investors an improved tool to use, build on the knowledge that exists on the phenomenon of common stock valuation, increase understanding of this knowledge, and finally, to reduce friction in the stock market

I wish to thank my wife for her understanding during the time I neglected her while writing this paper. Also, I want to thank Dr. Dawson for his patience in guiding me and awaiting the results of my effort, Mrs. Dallas Gillmore for her aid in locating reference materials, and Mrs. Jean Parrish for typing the original outline of the study

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