Dallas Business Consultant Elijah ClarkDallas Business Consultant Elijah Clark

Dividend and Non-Dividend Stock Valuation

Dividend and Non-Dividend Stock Valuation
Investors who invest in stocks often like to receive returns on their investment in the form of dividends. However, not all companies opt to offer dividends to their investors. There are three variables that affect the valuation of a dividend and non-dividend paying stocks and how stock valuation is influenced. Those variable influences include size, timing, and uncertainty of cash flows that the asset will generate for investors over its lifetime.

Company that does not pay dividends.
A company offering dividends is a potential signal to investors that the company is settling down and that its growth days are over. Dividends often depend on the size of earnings, and are key in determining the value of equity. Google Inc. is a company that actively invests in future company growth initiatives. Google does not offer dividends as the company hopes to continue its expansion into new business ventures. Taking into consideration the size of Google as a company, it is highly likely that the company will provide dividends at some point in the future. The dividend growth model can be calculated as the stock value equals next year’s dividends divided by the required rate of return difference and the constant growth assumption in dividends. A dividend growth model evaluates and considers dividends within share value and growth.

Merits and/or pitfalls of using the dividend growth model
Organizations that are likely to pay dividends in the future can benefit from using the dividend model. Investors can gain a return on their investment by purchasing stock from non-dividend paying companies and then resell those stocks for a profit. The problem with this method is that the stock is only worth what the next investor is willing to pay. If a company does not pay dividends and instead reinvest the profits into other investments, it could raise the value of the shares to be sold. The concern with using the dividend growth model is that it does not include risks. Furthermore, the model is only effective for company’s that pay dividends and is growing at a constant rate.

How variables affect the valuation of a dividend paying stock and a non-dividend paying stock.
Dividend paying stocks usually perform better than non-dividend paying stocks, considering the immediate value. Non-dividend paying stocks such as Google could use the model to predict future growth rate if Google were to ever start paying dividends. Cash dividends are generally easier to measure. Considering Google is a well-known stable company, if it were to ever begin paying stocks, the model could assume that the dividends would be constant for a time. As an investor, dividend-paying stocks are often a better investment as it can predict a return on investment. In determining equity value, both dividend and earnings-based models can be used.

The Gordon Growth Model is a good way of calculating a stock value. However, it can only used with company’s that pay a regular dividend at a constant rate. Consequently, the model is only effective for stable companies. In addition, it will only work if it the assumptions are continually proven accurate. The model also values the company based on investor payment and assumptions and does not consider anything other than the dividend when valuing the company. Investors and analyst like the model because It is an easy and simple to use method for generating assumptions. For lower dividend paying companies with high dividend growth, the Gordon growth model may not be appropriate. Regarding the dividend growth model, its shortcoming is that the model assumes the growth will be constant. However, there is no guarantee that the growth will be constant as it can be cut. A solution to this shortcoming is to move toward a two-stage or multi-stage dividend discount model (DDM). A multi-stage DDM estimates that a dividend will grow over a number of years at a certain rate.

A dividend discount model (DDM) is a way of applying net value analysis to estimate the future stock dividends and how much it will payout. The dividends calculated are then discounted back to their current value. DDMs assess the stock value based on growth rate. The projected growth rate is compared to the associated discount rate, and the current value is then determined. If the current value is more than the future market value, then that stock is undervalued, which is good for purchasing. The model is an effective tool used by many investors and analyst looking to select stocks. A disadvantage of the model is that it is not suitable for company’s that do not pay dividends. While DDM does not explicitly consider risk, it does assist in estimating the market risk premium. The DDM requires long-term growth rate data in dividends. The advantage of DDM is its simplicity of use.

Loan Evaluation

Financial Ratio Evaluations
Determining the ratio level of a company is a predictor of failure for small businesses, and obtaining data can be difficult. Financial ratios are effective for comparing different types of financial information. Short-term solvency financial ratios should be examined to determine whether a small business is an ideal business for a loan. Short-term solvency measures the company’s ability to meet its financial obligations by providing details about the company’s liquidity measures. Short-term solvency analyzes the company’s assets from cash, stress level, and ability to pay back its loan within the coming year.

Small Business Ratio
Of the short-term solvency, the current ratio is most important. A higher current ratio indicates a positive working capital, and there is a correlation between the current ratio and business size. The higher the current ratio, the more likely the company will be profitable the following year. In addition to current ratio, quick ratio could help in determining whether a business has the ability to meet its obligations. Quick ratio analyzes whether the company has assets in inventory and then deducts the valuation of those items to determine the true value of the organizations assets.

Additional Information
Additional information to obtain from the business owner before making a decision about a loan would be to check the market value and the company’s debt. Analyzing the business ratio to the ratio value of businesses within the same industry can be a predictor of business failure. Determining the debt of the company would help determine the risks level of the company. Debt has a negative effect on a company’s performance. A company with a large amount of debt would generate a high risk of insolvency and potential financial distress.

Large Business Ratio
If a larger company were to ask for a loan, instead of using short-term solvency, I would use long-term solvency considering it focuses on the capital structure and earning power. Long-term solvency is the ability to assure lenders with periodic payments of interest and repayment on the maturity of the loan. It also measures the company’s long-term ability to resolve its loans.

Earnings are better than cash flows for measuring firm value. However, small and unprofitable companies often value cash flows over earnings. As an investor, predictable earnings would be ideal considering they give a sense of how much profit will be paid versus what will be reinvested. In an attempt to avoid negative earnings, CFOs equate the idea of smooth earnings. In a 2003 study, 86.3 percent of nearly 3,200 financial executives stated that maintaining and increasing the company’s stock price helps to build credibility within the capital market as well as attract investors. In regards to meeting financial earnings target, several interviewed CFOs mentioned that they often made economic sacrifices in an attempt to deliver expected earnings. The results of the survey conclude that a majority of companies will sacrifice long-run value for short-run earnings due to market pressures.

If CEO’s have high stock options the firm is less likely to report fraudulent finances. Stock options with incentives can make moral hazard facing CEOs worse. Self-interested CEOs with opportunity to fraud, will likely harm shareholders. Executives with large stockholdings reduce the likelihood of fraud. Industry and firm characteristics are key factors that may affect fraudulent financial reporting. Industry characteristic and firm size are important organizational variations that influence white-collar crime. Principal-agent theory suggests that an increase in CEO options decreases the likelihood of fraudulent financial reporting. The presence of CEO duality and board stock options decrease the likelihood of fraudulent financial reporting. If no CEO duality and no board options are produced, fraudulent financial reporting becomes less likely. If there are board options, that likelihood increases. When a firm’s board of directors has stock options, the likelihood of fraudulent reporting decreases. The higher the CEO options, the less likely the firm is to report financial fraud.

Corporate Governance

A stakeholder is a group or individual that assist with structuring a business, and can influence the decision making process. Stakeholders often focus on multiple levels of a business depending on their position within the firm and their knowledge of the business and market. Shareholders have a general goal of maximizing business profits and their wealth, and can also influence the decision making process.
 
In the U.S., organizations primarily focus on generating profit for the shareholders. Within other countries such as the continental Europeans and Asian systems, shareholders tend to focus more on the interest of those within the corporation. Examples of stakeholders can include employees, customers, and suppliers. Shareholders can also be stakeholders, which means they can be directly affected by the organizations performance. Shareholder value has often been considered a way to measure corporate value. 
 
Shareholders can stimulate growth through offering rewards to managers, CEOs, and other senior executives. Shareholders also have the influence to elect board members with similar interest to represent their goals and help generate wealth. Business managers have a responsibility to keep shareholders happy. However, managers should first seek to satisfy the needs of the business. To effectively grow share prices, managers must exceed expectation or develop a new value proposition for the organization. As with most all businesses, the core offering will inevitably slow in generating growth. To maximize value, the organization should expand its development with new opportunities.
 
Wealth can be maximized by making strategic decisions and acquisitions that can maximize long-term earnings. While stakeholders view the organization as primarily serving the parties involved, shareholders value an organizations success based on societal wealth including share prices, dividends, and economic profits. Neither focusing all resources on profits or organization members is ideal and have their risks. At some point, both must matter in order to produce organizational value.
 
Finding a financial investor is paramount. However, it is not worth the money to have an investor that is not dedicated to the organizational goals or ethical in doing business and achieving success. Unfortunately, ethical problems stem from a lack of ethical standards and education. Additionally, moral reasoning is developed throughout adulthood and that leaders are often unethical because business graduate education fails to teach the subject. Nonetheless, as a business leader and decision-maker, it is my responsibility to have standards and remain committed to my personal ethics no matter who or how much money is involved.
 
Being able to satisfy and relay the company’s initiative to each group will generate and maintain a positive relationship. The objective in building the relationship is to find a common ground where both stakeholders and shareholders can agree. To find a common ground, it may be necessary to go beyond project task to find returns on investments for each party involved. Furthermore, by satisfying both stakeholders and shareholders, it builds trust between investors and decision-makers.  If the needs of the stakeholders are not addresses, company performance and shareholder returns could be adversely affected. Having trust creates cooperation and advantages for everyone involved.  By building trust and going beyond the needs of stakeholders and shareholders, firms can generate a commitment and organization bond. 

Trends in MIS

Major trends in technology that impact communication within organizations include; voice over Internet protocol, Web 2.0, and virtual networks. Unlike virtual networks, face-to-face (F2F) meetings provide limited support for global projects and establishments. Within virtual networks, a powerful infrastructure and high-speed data services are required from both network users, which can help prevent interruption of communication. Technologies used throughout virtual networks include; email, chat, phone, videoconference, group calendars, and other electronic meeting systems.
 
F2F meetings can be good to set the stage for a growing business relationship. However, technological communication presents an opportunity for the relationship to continue. Remote communication facilitates socialization, which may aid in completing extensive projects. Dispersed work and technology have become familiar to many people within organizations, and technology can be used by team members to minimize perceived dispersion. As technology and virtual teams grown, so will the tools and technologies to track their effectiveness. Virtual teamwork builds long-term social ties, and technology may present breakdowns in communication amongst development teams. While F2F integration furthers interpersonal ties and collaboration, technology is utilized to renew social ties and provide further interaction between remote users.
 
Trust has been connected to the success of virtual software communication, and F2F communication is often required to establish the trust and social ties. By remaining in social ties, the individuals build trust, and encourage rapport with one another. Challenges of distributed virtual software include time, culture, and location, and F2F meetings have been linked to better team performance Technology can be used by team members to minimize perceived dispersion. Trust is needed to establish social ties. Trust is critical to the relationship, but difficult to build at a distance. Virtual teams have a more difficult time establishing shared identity and are often more prone to conflict. For globally distributed projects, individuals should be acquainted with one another prior to joining in virtual communication, consider the original meeting builds trust and ensures smooth collaboration.
 
I believe that all businesses can use virtual networks within their organization to facilitate meetings with employees and employers. Considering most organizations have upgraded their structure to utilize technology and information processing systems, allowing employees to work and communicate virtually can increase productivity by lowering delays in communication.

IT Risk Mitigation

Technology has allowed hackers to create systems that bypass security measures while mining data from web sites. Organizations have almost become completely dependent on technology to run their everyday operations. In situations where security threats are possible, it is the responsibility of the decision makers to minimize damages and losses generated by security incidents. A major concern with security breaches is that many organizations do not know how to manage or countermeasure their effects. Individuals called hackers and phishers are responsible for most online thefts and fraud. These individuals use their abundance of computer knowledge to invade computer systems remotely to access, download, sell, and fraud individuals. Using, copying, and distributing intellectual software without permission, is considered pirating. Forging someone’s identity with the intent to use it for fraud is considered identity theft. Organizations should have a clear understanding of potential theft vulnerabilities, and have a plan in place to serve as a countermeasure if a breach were to ever occur. Organizations should focus on protecting the major three components of information technology (IT) systems, which includes people, information, and IT. Without the proper knowledge, hardware, and data security encryption techniques, organizations allow themselves to be vulnerable to IT security breaches.
 
Changes and innovative technology present many new security risks for organizations. Ethics is considered moral principles that influence behavior. Ethical individuals are viewed as having integrity, and a sense of knowing and doing what is fair and right. When handling consumer data, organizations should make an ethical decision to implement the proper security measures that can prevent hackers from accessing them. Organizations spend hundreds to millions of dollars developing and investing in security systems to protect against potential data breaches. Organizations must understand the importance of ethics, privacy, and security threats when handling information. A risk management system can be used to monitor and analyze security threats and create countermeasures. Security breaches can disable business functions, and pilfer confidential data including credit card information, social security numbers, and passwords. No matter the size of the organization, they must have an understanding of the financial cost of a potential security breach. Security breaches occur in many types of businesses including e-businesses. A security breach can create distrust, hinder reputation, and cause a loss in revenue. Risks are considered the terms in which an impact on a business process is caused by a loss of confidentiality, integrity, and availability. Organizations should be greatly aware of security concerns that threaten its information, customers, and resources.
 
Risk management requires identifying risk and implementing security controls. A risk analysis is used to identify risks using a business-oriented approach. Risk can be identified by constructing risk scenario’s, which are used to explore potential risk. As risks are discovered, management can prioritize the solution for the risk and resolve breaches based on the type and amount of security needed. It is recommended that organizations have a clear understanding of potential vulnerabilities, and have a plan in place to serve as a countermeasure. The primary objective of a risk analysis is to find risks and reduce their potential damage to an acceptable level. Information security should be integrated into business operations. A security breach and failure in IT could have a dramatic impact on organization success and survival.

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