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Investors are attracted to invest in a stock depending on the company’s dividend policy, which is defined as “the proportion of after tax earnings paid out in cash to the shareholders by a company” (lecture notes).
Several theories have been formulated that seek to explain how investors are affected by dividends and the value of their equity holdings. Let us write or edit the essay on your topic "Corporate financial management" with a personal 20% discount.. Try it now From the point of view of the investor, unnecessary risk may be averted if it became possible to forecast the future price directions of stocks. This is the rationale behind dividend theory, that supposedly dividends have informative content that convey to investors the value of the company, and would tend to influence investor attitude towards the stock.
The traditional view stated that use of debt lowers the cost of capital. With a lower cost of capital as discount rate, assuming the cash flows unchanged, then the value of the firm becomes higher. However, the problem with the traditional view is that it ignores the increased risk of gearing to equity holders, thereby increasing cost of equity (lecture notes).
According to Modigliani and Miller’s trade-off theory, firms should favour the use of debt. M&M theory showed that the higher the debt capital used by the firm, the higher the value of the firm, even to the point of maximizing value at 100% debt. M&M, however, states that capital structure or gearing (the amount of debt) does not affect the weighted average cost of capital, and therefore the value of the firm. The M&M theory assumes, however, very restrictive and unrealistic assumptions, ignoring entirely the cost of debt default and bankruptcy. Allowing for cost of bankruptcy, a point is reached where the benefit of the tax deductibility of interest on the debt is offset by increase in the costs of debt and of equity as a result of the risk due to high leverage (USF, 2010).
Miller and Modigliani (1961) theorized that in a perfect market, a firm’s investors
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The literature (Arnold, 2007, Brealey et al, 2006) on finance and accounting would seem to indicate that the NPV methodology is one of the most comprehensive and reliable tools to use in a project appraisal. The advantages of NVP are that firstly the tool recognises the time value of money by using a discount rate (12% in this case), often WACC is used as the discount rate (Tennentt, 2008).
It can be said that the Group is one of the largest and chief retail banks in the UK having a diversified and a large customer base. It is worth mentioning that the company is quoted both in New York Stock Exchange as well as London Stock Exchange (Lloyds banking Group.
This report is aimed at demonstrating how futures contracts can be used as a hedging strategy that would also isolate profitable opportunity for the firm. This been achieved by taking a long position on futures contracts, and the hedging strategy turn out to be profitable for the firm.
Bibliography Background Compass Group plc has its headquarters in the Compass House in Chertsey, United Kingdom. It is a British multinational company offering food and other support services. It has businesses in over fifty countries operating under various brands making it the world’s largest contract company offering food services.
announced an agreement to acquire Motorola Mobility on August 15, 2011. The deal was approved by the board of directors of both Google and Motorola. The deal was an example of a vertical merger where the software client, Google acquired the hardware client, Motorola.
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