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On Shareholder Value - Essay Example

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On Shareholder Value

These dividends form an incentive to the shareholders to hold a company’s stock. Capital gain is the gain that if gotten above an assets original buying price upon disposal. Any realised capital gain forms an investment that has been disposed off as at a profit. An unrealised capital gain may on the other hand refer to an investment which is yet to be disposed off, but would lead to a profit if it was disposed off. Assets that can realise capital gains may include options, bonds, shares/stock, or businesses. A buyback kind of program involves a situation where a company repurchases its bond or stock that it had issued previously. In that case, the amount of stock that is outstanding reduces and this gives the shareholders that are remaining a bigger ownership stake of that company in the process. (investorwords.com, 2011) Investors in the world over have gotten more informed and, thus, if they have made an investment in a stock and that stock has proven not of much return as they would have wanted, then, they are unlikely to continue holding on to that stock. Thus, this escalated demand for shareholder value has led to a lot of pressure upon finance managers of various organisations. They have to ensure that the companies are earning reasonable profits and besides that they have to come up with a very appropriate measure to shareholder value. This way, shareholders can monitor the performance of their investments. The task of getting the befitting measure for that can be an uphill one to most managers. In the recent times executives have adopted numerous metrics to determine shareholder value and these are with the inclusion of cash flows, operating profits, economic performance, and return on assets. All of these metrics can be applied one at a time or all of them in entirety instantaneously. In the recent past another metric was introduced by Stern Stewart and Company and this metric was known as EVA (Economic Value Added). EVA is said evaluate shareholder value through computing the magnitude by which profits surpass the given company’s cost of capital. However, cynics have said that EVA has proven inapplicable to such companies as internet companies. (Leahy, 2000) Cash flows Cash flows are usually used to determine shareholder value and this metric has been applied for a while. As per the book by Holler the cash flows of interest to the person seeking to measure shareholder value are the cash flows emanating from operations. Variances from these cash flows would show how the company in question is performing. A rise in the level of cash flows would, thus, translate to a positive performance of an investment. (Holler, 2009 p152) Use of discounted cash flows as a model of a company’s valuation has been applied for a while to measure customer satisfaction. Growth of these cash flows results to customer satisfaction plus less cash flow volatility. It should not be mistaken that this measure serves customer only; it is also a major metric to determine shareholder value. Actually as per this 2005 article by Gruca and Rego, customer satisfaction is measured through growth in cash flows and this translates to shareholder value growth. Thus, a growth in customer satisfaction eventually translates to shareholder value growth. According to this article, healthy future cash flows can only be secured through customer satisfaction and through this shareholder value can be enhanced. (Gruca and Rego, ...Show more

Summary

Name: Tutor: Course: Date: University: The expression shareholder value refers to that value which a shareholder gets from the investment he/she has made in a given company. It constitutes dividend payments, capital gains, buyback programs proceeds plus any other payouts that may be obtained by a shareholder from the company…
Author : gulgowskikyle
Essay on Shareholder Value essay example
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