Investment Assignment Solution
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Added on 2020-03-16
Investment Assignment Solution
Added on 2020-03-16
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Running Head: Means of Investment: Stocks & BondsAnalysis of StockValuation
1Means of Investment: Stocks & BondsAnswer 1 Nature of stock as an investment.Stock is the share of the stockholder in the ownership of an entity. It signifies the claim oncompany’s total assets and total earnings. Owning stock does not give the ownership to thestockholders rather it gives them the voting rights on certain matters that are held fordiscussion in the shareholder’s meetings (Gregoriou, 2009).Further, the stockholders are entitled to the dividend on the shares they hold in the company.Dividends are the part the part of company’s earnings that is paid out to the stockholders inreturn to their investments in the company. Stocks are issued by the company with theobjective of raising funds for its operations in order to grow and expand its business. Thestockholders can also earn return from their investments in company’s stocks through theprice appreciation (Cecchetti & Kharroubi, 2012). The gain on price appreciation is thecapital gain and is achieved when the market price of the shares increases in comparison tothe price that is being paid at the time of purchasing the company’s stock. Company’s issuesstocks majorly in one of two categories: first is the common stock and second is preferredstock. Stocks are at times interchangeably called as securities since it is provides the financialsecurity and sometimes called as equities due to the fact that stock represents the ownershipin company. Common stockholders owns a part of ownership in the corporation whereaspreferred stockholders enjoys the preference over the equity shares for the dividend isdistribution. Moreover, there is a fixed rate of dividend in case of preference shares whereascompanies generally offer fluctuating rates of dividend depending upon the level of profits ofthe company (Chang & Shi, 2011). Shares separates ownership with the management andthereby allowing the external parties i.e. the investors to economically participate in company
2Means of Investment: Stocks & Bondsas they possess voting rights in the meetings on various business matters like for theappointment of managing directors and managers of the company. This power promotes theallocation of company’s resources specially the human capital (Goyenko & Ukhov, 2009). Normally, shareholders have one voting right available per share. With the privilege ofvoting rights the company’s equity stock suffers from some limitations as described further.With some exceptions, there is generally no fixed date at which the dividend is paid out to theshareholders and even there is no fixed guaranteed dividend rate. Therefore, before investingfunds in the company’s stock the potential investors must consider various factors such astheir return and risk expectations as higher returns involves higher risks and if the investorsare not ready to bear higher risks, they must not invest in the shares yielding higher dividendrates. A company’s stock may be traded publicly in the stock markets or they may be tradedprivately (Baker & Wurgler, 2007).Stockholders do play an important role in the management of firm’s business as they directlyor indirectly participate in company’s important business matters such a financing,management, governance, controls and other significant considerations (Fernández, 2007).Firstly, in financing the funds for the company’s operations. In return, the stockholders aregiven the part ownership (Guidolin & Timmermann, 2005).Secondly, stockholders participates directly or indirectly in the company’s operations. Asthey are entitled to elect the board of directors of the company who supervises the chiefexecutive officers (CEO) and also the chief financial officers (CFO). The potential investorsinvest their monies in the company’s which has sound performance track and beats theinvestor’s expectations time to time otherwise they imposes pressure on the corporations torepay their invested funds. This factor compels the company to beat the profit projections.The corporate governance practices also requires the company to maintain greater level of
3Means of Investment: Stocks & Bondstransparency with adequate amount of disclosures in the financial reports (Gitman et al.,2015).Therefore, the framework of corporate governance demands the management to carry outtheir accounting and financial operations adequately as they are indirectly accountable to theshareholders of the company. Stockholders generally determines who actually controls thecorporation. They can prevent the hostile takeovers of the company if they believe that theacquirers are not offering appropriate price. Institutional shareholders can also publicly callon management of company to take strategic decisions like mergers, amalgamation, spin offsetc. (Foerster & Sapp, 2005). The public corporations have to incur various regulatory costs for its stockholders such asexpenses in relation to conducting the annual general meetings and payment of legal fees andother related costs (Gebhardt et al., 2005). Therefore it can easily be concluded that the stockholders plays vital role in the managementof the company in direct or indirect manner. Although they do not participate in the internalaffairs of the corporations in which they have invested their funds, but yet they have thepower to influence the company’s functions.Answer 2: Comparisons of cash flows stemming from stock and bonds investmentsBonds and stocks are the most common types of investments in the corporate bodies used bythe potential investors. Both the investment options provides the returns to the investorseither in terms of interests and dividends respectively. There are also other forms of returnsfrom these investments. Each option has its own advantages and limitations in terms of
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