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Financial Economics - Essay Example

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A stock option plan is a strategic compensation plan utilized by many organizations that are unable to pay high salaries to retain old personnel and attract new recruits. The stock option plan allow its holder to purchase common stocks of the company they work for at a…
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Financial Economics
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Download file to see previous pages Over time the option can gain a lot of value if the price of the stock rises since the employee has the right to purchase the stocks at the predetermined price. Since the objective for the employee is to gain the maximum monetary benefit possible as a beneficiary of a stock option plan I would encourage the company to implement financial and investment strategies that will increase the value of the firm. In order to learn the best strategy to optimize the value of the stock option plan we must evaluate the potential effects of the company choosing increased dividend payout strategy vs. stock repurchase program.
The dividend payout policy of a firm refers to the decision regarding the magnitude of the dividend payout which is the percentage of earnings paid to the stockholders in the form of dividends (Referenceforbusiness). The owner of a company’s common stock will always prefer to have the highest dividend payout possible. One of the main reasons people like dividends so much is because they are obtaining an immediate financial return instead of waiting for the sale of the stock to achieve a capital gain. In order to better understand the effect of dividend we must recognize the existence of retained earnings. At the end an accounting period when profits are determine the board of director can either declare dividends or kept the profits in the form of retained earnings. When money is not distributed and it is kept as retained earnings the company can utilize these funds to make the business grow. If a company is able to invest its money wisely in high yield projects, the firm can achieve internal grow that will raise the market value of the company.
During bad financial times such as the current global recession it is common for companies to reduce their payout of cash dividends in order to maintain its liquidity and to keep its cash balance as high as possible (Bigda). A sector that has been horribly as far as reduction in ...Download file to see next pagesRead More
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