Stock Valuation and Bond Issuance
Stock valuation effects on shareholder value
If the dividend per share is increased by $1.75, the dividend yield increases, which means the shareholders’ value is increased.If the firm doubles its outstanding shares, the dividend yield decreased, which means the shareholder value is decreased.If the company’s goal is to maximize shareholder value, increasing dividend yield supports the goal while doubling the outstanding shares inhibits the goal. Increasing dividend yield means the earning per every share held by the shareholder will increase, and the shareholder’s value can therefore increase, and the move can be said to support the company goal of maximizing shareholder value. On the other hand, when the company doubles the number of shares held by the shareholders, the dividend yield per share will decrease by half, and that means the value of shareholders will decrease (Kirchhoff, n.d). Doubling shares is diluting the ownership, and the amount set aside for dividend payments will not be enough to maximize shareholders” value.
If the company raises money through bond issuance at an interest of 5%, the present value of the bond is $61,027, if the interest increased to 7%, the present value would be $50,257, and at 3%, the present value is $74,247. Offering the bond at 7% will be very expensive to the company the same as at 5%, and 3% becomes the cheapest rate of issuing bonds. Offering at 3% is viable for the company as it is cheap for the company. Bond valuation is a viable option of increasing capital as it shows the extends of the bond expenses. The company is issuing enough bonds to achieve its goals, although higher rate bonds are very expensive and can hinder the company financing goals. In comparison, cheaper rate bonds support the company’s goals.
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