By Ruth Bender, Keith Ward
I educate seminars to skilled bankers on threat administration and company capital elevating. this can be the 1st, and in basic terms, booklet i've got stumbled on which supplies a true framework for knowing capital-raising offerings made by way of enterprises that's sensible, instead of basically educational (which isn't how judgements are made via CFOs and Treasurers, for correct or for wrong!). Very hugely prompt for capital elevating. it ranks, in my view, with Charles Smithson's "Managing monetary Risk," at the possibility administration facet, because the unmarried top books on hand. it's in no way out-of-date, however it will be extraordinary if it have been ever up-to-date to incorporate "new financial system" businesses that frequently have destructive EPS.
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Extra resources for Corporate Financial Strategy
If any of the profits were reinvested the business should grow, whereas if the dividends paid out were greater than the profits earned the business would get smaller over time; therefore, a 100 per cent dividend pay-out ratio is essential. 2. Either of these can be used in a valuation. 2, for a steady state company the appropriate P/E multiple equals the inverse of the company’s cost of equity capital (Ke). It cannot be emphasized too greatly that this relationship only holds for a steady state company.
This being the case, why does financial theory (and Anglo-American financial practice) dictate that shareholder value is the appropriate corporate aim? There are various responses given to this question, for example that the shareholders are the owners of the company, or that it needs to keep them satisfied in order to protect access to future funds. The answer that we find most persuasive is that the shareholders are the only direct stakeholder group who do not have a contracted relationship with the company.
Shareholder value will only be created if the company beats this growth target. CONCLUSION A company’s share price reflects the market’s expectations of its future performance; the higher the share price relative to current earnings (as measured by the P/E ratio), the harder the management will have to work to achieve (or, more importantly, exceed) the growth inherent in the share price. This chapter has illustrated two ways of calculating that required growth: the simple dividend growth model, and the more useful steady state model which will feature throughout the book.