Introduction on Wealth
“Wealth” while hearing this word, all aware about to know how rich a person or a company is. But, the definition of wealth changes from historical ages. There is no standard definition for wealth. One could say that wealth is having much cars and money and another could say wealth is being healthy. Coming to finance sector, Wealth is the term used to describe the value of a company, country or other entity. Usually, advisors measure the net worth of a company in order to determine how the company wealth is.
Net worth is calculated by using all assets of a company after deducting the debt amount from the income. If the net worth is high, then the wealth of a company is in high.To determine wealth, investors or financial advisors’ measures debts, liabilities and return amounts of a company. The main aim of the document describes the what are the components that play in wealth.Primarily the document focuses on the impact of the wealth components on organization. Secondly, concentrates on terms of debt of a company and their role play in an organization.
Role play of dividend and Investments in an organization
What is dividend
Dividends and Investments are well essential to know how wealth a company is. Dividend is the partin company profits that paid to investors or reinvested in order to earn profitable earnings. Few companies use stocks as dividends. Companies like Alphabet.inc and Amazon not ever paid dividends and not all companies share stocks as dividends. Here, a question raised that why company paying dividend to shareholders? They have many reasons likecompany wants to gain attention of investors or to show its ability of generating profits(Amond, 2024).
The mathematical expression to calculate dividend is dividend per share = dividends paid/ outstanding shares or EPS * dividend ratio.Formula states that dividends will payproportional to the shares of shareholders. For instance, XYZ company have $ 200000 as initial shares and $ 300000 shares at end of period. Its annual dividends are $300000 with 30% retention ratio. Its DPS value is 300000/ ((200000+300000)/2) = $ 1.2 which means company XYZ pays $ 1.2 to the shareholders as dividend per share.
Dividend impacts on Investments
As said earlier, dividends might reinvest in a company. If the dividend value increasing yearly, it helps to improve wealth of company. Suppose; Over five years, company XYZ EPS increased from $25.4 to $ 56.7 and DPS value also increased from $ 1.2 to $ 4.04. The company maintaining a steady flow of increasing leads to attract the investors for further investments. If the DPS is high, investor shows much interest to invest. if it is low, then there is a chance to loss the investors. Company which has new investments,shows it is in better position and also increasesthecompany wealth and reputation.
The value of dividends has great impact on expansion of company and shareholders decision and also have high impact on determining risk factors. Company A paying $ 3.43 per dividend share and another company B paying $ 5.6 DPS. Then the investor attracts by the company B which paying high DPS and chance to loss the investors within the company A (Cornett, Jr, & Nofsinger, 2023).For shareholder’s dividend is the powerful tool to determines their income of investment. Also, it majorly impacts on stock price for future.
What is investment
Investment is the process of investing money with a hope of earning profits in any form. In finance sector, there are many types of investments like funds, bonds and stocks etc. For every type of investment, the aim is to generate returns for their invested amount(Napoletano, 2022).
What is NPV and the impact on investment
NPV, referred as Net Present Value is the capital budgeting technique used to measure the value the company expecting from the project and it increases the wealth of a company. The mathematical expression of NPV is
Here, CF= clash flows of n period n=0,1,2…. N
i = discount rate
n = time period
If a company wants to invest 5 years project, then it calculates NPV to determine whether the project worthful or not. If the NPV value is high or above zero then the project is worth. Company might invest in this project. If the NPV is below zero, it is better for the company to leave the project and save the investment money for further projects (Cornett, Jr, & Nofsinger, 2023).
What is Return on Investment and the impact on investments
Return on Investment, also referred as ROI is the value the measures the return amount of what company invests. It also determines the financial position of a company. The mathematical expressionof ROI is:
ROI = Net profit/ Investment cost *100
Suppose; Company XYZ, invested $ 50000 for a project and also invested $ 1000 for operational and others costs so, total $ 51000 invested by the company. The profit amount that the company receives is $ 80000 then the ROI is 80000/ 51000*100 = 15%. Here, it is positive ROI means company XYZ is much profitable from the investment and generates higher revenues. Also, it reflects the investors opinion to invest in the same company for further implements. If the value of ROI is negative then the investment is waste leads to company investors loss their money and made bad opinion on the company.
Role of long-term debt in the Company’s Capital Structure
Before understanding the role of long-term debt, first understand about what is long-term term and capital structure. Long-term debt is the amount offered by the bank which has high maturity level more than a year. In finance Sector, debt and equity are the essential to optimize the capital structure. Long-term debts are very useful for a company than short term debts. They provide low rate of interests and tax incentives. It provides stability to the capital structure and also it also provides stable cashflows for long period of time. Long-term debt provides tax incentives which means the taxes are deductible as per interest rates for the period of time. It increases the capital amount to invest on long period projects. Also, provides high return amount leads to increase company revenue. Long term debt with low interest rates increases the ROA factor(Shumali & Abuamsha, 2022).
financial and assurance sectors
The role of long-term debtis important to improve the economic stability of a company. It helps to improves the company credit rating. Company with high credit rate in market shows it is in very good condition to invest. It also helps to borrow the cost with less interest payments. The impact of long-term debt combined with ROA factor have positive impact on industrial, financial and assurance sectors. Relationship between debt and equity should be stable. Resulted to reduces the financial risk management. Unlike short-term loans, it has fixed intertest rate to maintain stable finance structure. Usually, long term debts involved with many risk factors but the company who investing in long-term debts have ability to build strong capital structure.
For instance; Company A takes long term debt amount as $ 500000 and the equity value is $200000 then the total capital amount is $ 700000 from the capital amount, the net profit is $ 70000 then the ROA is 70%. Company B didn’t take long-term loan, itself the company have equity value is $ 300000 then the total amount is $ 300000 and the net income is $30000 then ROA is 30%. While comparing,company A have sufficient amount of assets to manage the operations and to build strong capital structure.
Role of long-term debt on company innovative performance and growth
Long term debt usually used for company operations and implementing new ideas in order to improve the financial stability of a company. Company performance and growth rate has close relationship. If the company performances well which means the growth of the company in market increases. If the performance is low then the company growth rate decreases. To perform the operational and economic activities, company usually prefer long-term debts than short term debts.
As said earlier, long-term debts usually involve with low interest rates. It is very beneficial for small organizations to perform long-term activities with long-term debt. It increases the growth rate. The main strategy to perform innovative activities in a firm only through long-term finance. Because, the long-term finance makes stable cash flows in a company which leads to implement new innovative creation within the organization. Investing long-term debt helps the company to train the employees to develop new innovative software. Also, creates new opportunities to meet the long-term goal of a company. For the above example, Company A have 70% of ROA which means company significantly using its assets to generate the profits and have sufficient amount to create new ideas(Bannerman & Fu, 2019).
Conclusion
To be conclude, it determined thatdividends and investments are very essential to improve the wealth of a company. It stated that, dividend value hasmuch impact on investors decision of investment. Likewise, it determinedNPV and ROI values are important factors for investors to determine the company ability of generating profits. Also stated it had greater impact on shareholders either in positive or negative way. Additionally, it specified that long-term debts play a crucial role in building strong capital structure. Moreover, determined that investing in long-term debt is the main tactical to improve company growth rate.
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