Can i get a feedback to this discussion post below. please avoid repeating what
ID: 2811796 • Letter: C
Question
Can i get a feedback to this discussion post below. please avoid repeating what is already stated in each discussion below. Thank you
2. Leverage can also impact you in your personal life. Explain how you can use it to your advantage.
Let’s start with the definition of leverage. Leverage is any process that compounds risk. In terms of investing, it is defined as the process of using borrowed money to make money. This is not uncommon and is one of the best ways to build wealth. There are several advantages to leveraging in your personal life. If done correctly, leveraging can be very productive if understood and used the correct way. An advantage is using borrowed money, money that you see yourself not having to be able to purchase a home or make an investment that you anticipate to increase in value over time. Using the house example, when borrowed money as a mortgage you can take advantage of the interest payments creating a tax deduction for your own finances. An additional advantage is leveraging may case what’s called forced savings. Taking the liability of a borrowed lump sum and having the money immediately work for you, and at the end of the borrowed term, you can pay back the borrowed money and have a good lump of savings in your personal account.
4. What are the advantages of stock repurchases versus paying dividends?
Advantages-
Repurchasing is viewed as a positive signal to investors because it is often motivated by management as a belief that the shares are undervalued. This is true for occasional repurchases and not so much for regular repurchases. The company will usually see this as a purchase of their own stock as a lower price within those months of purchase.
Stockholders have a choice when a cash repurchase happens. To sell or not to sell. Versus a cash dividend, shareholders much accept the dividend payment.
Dividends can have a negative signal out to the public because of the concern that it may not be sustainable to continue to distribute and or increase in the future. Therefore, stock repurchase would be considered as a may be only a temporary excess of cash.
With a repurchase, firms would be able to use the residual ratio to set a target cash distribution level and then divide the distribution into a dividend component, resulting in the company having more flexibility in adjusting total distribution than if a cash dividend, because repurchases can vary from year to year.
Repurchases can produce large scale of capital restructuring. Just as we see in today’s economy, corporations are importing cash back to the states and distributing cash bonuses to employees as well as announcing stock repurchase programs.
Companies can use stock options as employee compensation. This technique allows companies to avoid issuing new shares resulting in diluting earnings.
6. What is the difference between a stock dividend and a stock split?
A stock split could be taken in the approach that the price per share is too expensive for an investor to buy into as well as management seeing an undervalue in the stock as it is expensive. Therefore a firm may declare a stock split to lower the price, allow investors to buy in and in return increasing the stock price due to increased demand and also increasing the company’s value. Stock splits are usually used after a sharp price run up to produce a large price reduction. Stock dividends are used regularly, usually annually or quarterly keeping the stock price more and or less constrained. Stock dividends do tend to cause bookkeeping issues and expenses, therefore companies today tend to do stock splits far more.
https://retirehappy.ca/the-benefits-of-leveraging/
Ehrhardt, M. C., & Brigham, E. F. (2017). Corporate finance: A focused approach. Boston, MA: Cengage Learning.
Explanation / Answer
Answer 2)
Leverage in capital structure means the use of borrowed funds.
Firm "leverage" its capital structure in the following way
1) Taking term loan from financial institutions
2) Issuing Debentures
3) Issuing Bonds
4) Issuing commercial paper
5) Taking working capital loan in the form of OD/CC
These are some of the ways to leverage capital structure
The advantage of Leverage:
1) It increases EPS and returns on equity
2) Leverage is cheaper as the cost of debt is always lower than the cost of equity
3) Leverage helps in controlling the dilution of control of equity as if the same fund is raised through equity it may lead to dilution of control
Disadvantages of leverage:
1) Leverage increases the financial burden on the company as there is a fixed payment to be made every year
2) The company will have to meet the obligations irrespective of financial position
3) Debt holders are paid first in case of dissolution of the company, equity holders are paid at the last which may be disadvantageous for them
Answer 4)
Stock Repurchase has following advantages over Dividend payment:
1) Dividends are subject to Dividend distribution tax, whereas share repurchase doesn't have any tax implication
2) Share repurchase strengthens the ownership and control of existing shareholders
3) Share repurchase shows the confidence of promoters on business.
Answer 6)
Theoretically, there may be a difference between stock split and stock dividend, but from the practical point of view or from Net worth point of view there is no difference between the two, both lead to same net worth in the hands of shareholders.