Stock splits

According to the perspective of most trader’s stock, splits offer opportunities for high trading. They see the splits as decisive progress both in terms of goodwill and value for the shareholders and business. In corporate circles, the splits are utilized by the executives as tools for investor relation and marketing.

A stock split can therefore be described as a move by the company executives to increase their outstanding shares by giving the existing shareholders more shares. This move has direct impact on the stock prices, in that after the split the stocks value will reduce due to the existence of growth within the current outstanding shares. Therefore, even though there has been a change in the stock value and outstanding shares, the market capitalization remains the same.

Stock splits occur in companies if they have seen a substantial increase in their share prices although the price per share decrease while outstanding shares number increase, the company value and capitalization within the market remains constant. In an overview their primary role is to make the shares attainable to the small investors while concurrently giving greater marketability and liquidity.

Reverse split is another unique type of stock split. Typically companies with low share prices use this method if they would like to raise these prices to either prevent the company from delisting or increase their prices to gain more weight in the market.

Possibly long and short term effects of the splits on company’s financial statements include: there being no permanent effects since after the short term initial increase of the price value and transaction costs during the declaration they normalize and remain as they were. Long-term outcomes include steady growth of the consistent earning and cash flow due to the issuance of additional shares to the existing stakeholders once the spike period has subsided.

Both businesses and stakeholders utilize leverage to develop greater returns on their possessions. Two types of leverages exist that can be used by companies that are financial and operating leverage. Operating leverage coincides with the outcome of various blends of both fixed and variable costs. Mainly on the ratio of those fixed and variables a firm uses, determine the amount of operating leverage it implements.

On the other hand, financial leverage happens when a business funds its assets mainly through taking on debts. This is often done when businesses cannot raise enough capital and therefore issue their market shares to finance their needs. Firms only choose this path when it is sure that the return rates will be more than the loan interests.

The effect of using these two leverages on a firm has been foreseen to be negative in terms of investments. For example, firms that have exceedingly high operating leverages automatically often have low sales but high margin levels. This highlight a high-risk impact if a business miscalculates possible future returns. In that if projected returns are higher than the estimates, it could result in a huge gap between budgeted and actual cash flow, which directly will impact a firms future ability to operate. In addition, this lowers a company profitability and equity of returns.

A company should determine the correct amount of leverage to use or it stands to risk a default and total bankruptcy. This can be approached from the amount of debt it has within its capital structure.This will have many advantages since it will enhance its cash flow, capital and returns. However it first has to approximate its equity value, assess its risk appetite, optimize its capital framework that is ratio leverage and quantify its debt costs.

The primary explanation as to why the furniture store and grocery shop inventories value differ mainly lies in their products. In that for the grocery store, its products are perishable. Thus, its time limit is shorter as compared to the furniture store which can hold the inventory for longer before their products become useless. This explains why the groceries stock is higher since its products are used on a daily basis as compared to those of the furniture store which can stay for years on end.

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