Stock and Bond valuation
FIN 550
1
Stock valuation:
B ) At current dividend yield of 5%, valuation of shares throughout the three years
have been quite similar , overall increase in value of shares in 2021 is 41 million in
comparison to year 2019.in year 2021 its shareholders value stands at $16 million,
compared to 15 million in 2019, while in 2020 it has decreased to $13 million.
While the dividend per share has been increased by 1.75, Dividend yield increases to
6.3% in 2019 and 6.32% in 2020, while for the year 2021 it has increased to 5.82%.
Shareholder value remains the same in all the years. Total outstanding shares also
remain the same through these changes. So, if Company was looking to maximize
shareholders wealth, there has not been much change or we can say rather there has
been no change at all in spite dividend per share has been increased by 1.75 (Fabozzi
& Markowitz, 2011).
After split of shares condition has applied in that scenario dividend yield would go
down also market value of shares go down but value of shareholders remains at same
level, total number of outstanding shares increase to 3 million for each of the years in
consideration (Jordan et al., 2021).
* if company’s objective is to maximize its profit in all these scenario, company is not
able to do so as overall value remains same in all other conditions, so company is not
able to achieve its objective in terms wealth maximization of shareholders.
C) Company’s dividend policy is hindering their strategies, since dividend given to
shareholders does not increase the value of shares, overall return on investment is
negative in year 2019, and 2020. So Company should really think of to reinvest their
profit rather than distributing it to shareholders (Werner, 2010).
2
Bond Issuance Analysis
B) In case there is increase in interest rate by 2% annually then PV also increases by
2300$. But at same time fixed obligation in terms of interest payment also increases
by $3000 semiannually. Issuing of bond increases the leverage position of company
and also gives tax advantage to company as it is allowed as deduction before payment
of tax. But on the other hand it also increases its risk profile since a fixed liability
towards interest payment is created , so if company has good base of equity , which is
there in this situation for the company in consideration , company can use it in such a
way that its overall WACC remains minimum.
If interest rate is decreases by 2%, then PV also decreases by 1765$ but at he same
time its fixed obligation related to semiannual payments also decreases by $3000
semiannually. Since issuing of bonds provide company necessary leverage as well as
tax advantage (Hackel, 2011). If fixed liability doesn’t increases by much then it could
be a good option to have for the fund raising.
In present case of interest rate of 5%, company has PV of bond as 302922.97$ and
fixed interest obligation as semiannual payments. Looking at company Capital
structure it can be a good idea to issue bonds as its increases leverage position as well
as gives tax advantage.
* Company’s bond issue policy can support its strategies if it used for capital structure
changes as overall WACC can be minimized through right mix of equity and debt. But
if it is used for funding operating exp., refinancing of debt, it would be a hindrance in
its strategies because it will present a wrong picture in eyes of shareholder and
company’s solvency will be in doubt and its risk profile can be increased significantly.
3
References
Fabozzi, F. J., & Markowitz, H. (2011). The theory and practice of investment
management: Asset Allocation, valuation, portfolio construction, and
Strategies. Wiley.
Hackel, K. S. (2011). Security valuation and risk analysis: Assessing value in
investment decision making. McGraw-Hill.
Jordan, B. D., Miller, T. W., & Dolvin, S. D. (2021). Fundamentals of Investments:
Valuation and Management. McGraw-Hill Education.
Werner, S. P. (2010). Short selling activities and convertible bond arbitrage:
Empirical evidence from the New York Stock Exchange. Gabler Verlag.
