The theoretical value of any stock is the net present value of the future flow of dividends. Some technology companies have extremely high price to earnings ratios. These ratios are obviously do not reflect reality as growth at the rate indicated by the ratio would quickly make them larger than nearly all existing corporations. The ride up is nice but the tech bubble bursting has left many bankrupt. You should consider how much the corporations earnings would have to grow to justify their valuations.

Alternatively, the approach of picking the best country, best economic sector, best industry and best company in that industry by using financial ratios has been a proven money maker over the last one hundred years. Keep this in mind as you consider this corporations in this week.

Click the link in Step One (which will open a new browser window) and then follow the steps on screen by clicking back and forth between the two windows.

1. 2. Go to theSEC website(Links to an external site.).
2. 3. Go to the Filings tab: Company Filings Search.
3. 4. In the Company name box enter Google Inc and search.
4. 5. In the Filing Type box enter 10-K and click search.
5. 6. Select the 10-K for 2005 filing date.
6. 7.SelectDocument1file:d10k.htm

Theoretically, the price of stock should reflect the net present value of the future flow of dividends utilizing a risk adjusted discount rate. Nevertheless, certain stocks such as Google have phenomenal price to earnings ratios. Discuss why the price-to-earnings ratios are so high and what the justification may be for their stock prices.

Comment on:

1. High stock prices reflect higher earnings growth.
2. Some believe the stock prices are unrealistic and rely on the bigger fool theory.
3. Recall the tech bubble bursting after March 2000.