Valuation Revise posting Stock Valuation
This assignment analyzes the stock and bond valuation for UPS to understand shareholder value and capital. For th
This assignment analyzes the stock and bond valuation for UPS to understand shareholder value and capital. For the stock valuation, the dividend yield increased when the dividend per share was increased by $1.75. However, the rate of increase was different based on the stockholder’s equity position and share price. The dividend yield reached a high point in 2015 and lowest in 2017, reflecting the lowest return on investment. Overall, each of the calculations will impact shareholder value.
The impact realized on shareholder value when the company’s dividend per share was increased by 1.75 is an increase in the general shareholder value. This effect can be observed from an increase in both dividends per share as well as increase in dividend yield. The increased effect on shareholders’ value would be greatest when stockholder’s equity is lowest and vice versa (Domash, 2009).
On the other hand, calculations about the effect on the dividend yield if the firm doubled its outstanding shares depict a general decrease in the stockholder’s value. In this regard, the dividend yield would decrease by more than 100% on average. As such, the general implication to the shareholder value is that it will fall. Typically, this means that the value of the stock to shareholders would decrease when the number of shares increases. This aspect explains the reason for the highest dividend yield and dividend per share in 2016 when the stockholder’s equity value was the lowest compared to 2015 and 2017 values. The effect of doubling the outstanding share is also highest in 2016 compared to 2015 and 2016.
In the case of calculating the rate of return on investment, the cost of stock based on the new dividend yield calculated previously would be highest in 2016 at 6% and lowest in 2017 at 4%, further depicting how smaller stockholder’s equity is more valuable to shareholders than larger stockholder’s equity . The effect on shareholder value is also relative across these annual periods. Generally, ROI is highest in 2016 and lowest in 2017 , which reflect an effect on shareholder value, also a combination of factors are in place including changes in dividend policies by the company, capital gains, and recorded dividends (UPS, 2018).
Considering that the company’s goal is to maximize shareholder value, increasing the dividends per share by 1.75 would be the best strategy for UPS to maximize its goal of maximizing its shareholder value. When the dividends per share are increased by 1.75, the dividend per share and the dividend yields would increase by more than 50% as depicted across all the financial years including 2015, 2016, and 2017 (UPS, 2018). The shareholder value would thus increase. However, doubling the outstanding shares would be the worst decision that the company could ever make. In this regard, the shareholder value would decrease by almost the same rate as depicted in the analysis, whereby the dividend yield and dividends per share values decreases significantly, when the outstanding shares are doubled.
I greatly feel that the company’s dividend policies hinder their strategies. In this regard, the company is attempting to grow by distributing its shares to investors through selling shares. The implication in this situation is an increase in the outstanding shares, whose effect would be a decrease in dividend yields and consequently a decrease in the shareholder value.
In the case of bond issuance, the new value of the bond if overall rates in the market increased by 5% is $13,691 from $8,355. The future value of the bond in 10 years depicts are value increase of the bond value by $5,336. In a situation whereby the overall rates in the market stayed the same, the bond value would only increase slightly to $11,522. This change in value is an increase by $3,167. Each of the calculations performed is expected to have some effect in terms of the company’s decision to raise capital through bond issuance (UPS, 2018).
In the case of a 5% market rate, the increase in future value of the bond is impressive because the company would gain 64% from the present value in 10 years’ time. When the market rates increase further by 2%, the bond yield would be 65% after 10 years. A slight decrease of the market rate by 2% would see the bond issuance strategy still lead to positive yield of 62%. Even if the current market rates remained the same, UPS would still earn 40% of its original bond value in 10 years. As such, I would consider the bond valuation to be a viable option for increasing capital because bond issuance is a guaranteed way to increase capital because the bond would yield handsomely despite market fluctuations (Domash, 2009).
Typically, I slightly feel that the company’s bond issuance policies support or hinder their strategies. The company is attempting to fund operating expenses and refinance old and it is issuing bonds. However, it could start issuing significantly sufficient bonds to achieve these goals.
Domash, H. (2009). Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition). Upper Saddle River, NJ: FT Press.
UPS. (2018). 2017 UPS Annual Report. 2017 Annual Report, 1-152.