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Running Head: Milestone 2

Milestone 2

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Nathan Lasky

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October 11, 2020

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FIN-550-Q1612 Corporate Financial Management 20TW1
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Gary Hascall
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II. Stock valuation

UPS is looking to determine the different dividend yield and amount per share that affect

the shareholder’s equity and their ability to reinvest back into the company. UPS runs a stock

valuation to view how increasing the dividends per share and doubling its equity change the

business. The first calculation made is determining how the cash per dividend issued affects the

dividend yield. The shareholder’s equity remains the same, but by increasing the money paid by

$1.75, the yield increases by over 1% for each year. This increase can indicate to shareholders

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that the company is experiencing a strong performance and that the company’s earnings growth

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can be sustained (Chen, 2020, July 30). With UPS increasing the amount paid, it would

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contribute to the idea that the company performs better and creates a safety net for investors.
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They would see the growing amount paid out, which could lead to further investment in UPS.

Investors who see this increase in their dividend yield and cash payout tend to invest those
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additional dividends back into the company due to the increasing returns (Chen, 2020, July 18).
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The second calculation shows UPS increasing their outstanding shares. By creating this increase,

it lowers UPS’s dividend yield and cash payout per dividend. With the increase of the
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outstanding shares, UPS may be increasing the number of shares issued (Chen, 2020, January

31). Investors could be detracted by this move as the dividend yield and payout significantly
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decrease compared to the current data. UPS’s best way to maximize the shareholder’s value
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would be to increase the payout and dividend yield. As it was previously stated, the increase

could lead to reinvestment. One disadvantage to the increase investors could view is that UPS is
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potentially spending on dividends rather than reinvesting back into the company creating

stagnant capital gains (Chen, 2020, July 18). If this is not the case, then the increase in dividends

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would support the company's growth in strengthening the shareholder’s equity as the stock prices

increase.

Next, we review UPS’s dividends policy to view if it matches what was discussed with

shareholder’s equity in the previous paragraph. There are three types of dividend policies that a

company can use, which are stable, constant, or residual. Constant does not appear to be the case

here as UPS is viewing the possibility of increasing the dividends. Stable is the most common

and seems to be UPS’s strategy as residual can prove far riskier for investors. The stable policy

applies a steady and predictable dividend payout each year and aligns with the company’s long-

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term growth rather than focus on quarterly earnings (Chen, 2020, September 26). This policy

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does provide a dividend to investors, no matter how the company is doing, and proves to be a

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safer option for investors. UPS will want to ensure that they maintain a strategy that helps the
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company grow and pays shareholders a fair amount to help encourage reinvestment and new

investors. They would need to show investors that by them increasing the payout on dividends, it
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is not greatly affecting their retained earnings, and they are still able to invest those funds back
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into the company to encourage growth. Some researchers even suggest that these policies are

irrelevant as shareholders can sell a portion of their shares or portfolio if needed (Chen, 2020,
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September 26). It is merely a theory that maintains that these payouts don’t affect the stock price,

but it could lead to other investors putting money in the company and thus increasing the stock
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price. UPS needs to balance reinvestment in their company and pay out a fair amount to
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investors to show substantial growth in the company for their current and future investors.

III. Bond Issuance

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UPS is looking to complete a bond valuation on a ten-year bond with a face value of

$100,000. The goal is to determine how the different percentages affect the different payments

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and present value for the bond. Bond valuation determines the bond's par value or fair value by

calculating the bond's present value based on the bond's face value (Chen, 2020, February 25).

UPS begins with a 5% interest on the bond and then calculates the bond with an interest rate of

7% and then 3%. It was found that the higher the interest rate, the higher the present value for the

bond. The purpose of these calculations gives UPS an idea of which bonds to issue and can

provide UPS a way to raise capital rather than taking out bank loans when issuing the bonds.

Bonds allow UPS to structure these loans with different maturity dates, are often less expensive

than equity, and do not entail giving up any company (Smith, 2020). The interest paid out on

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these bonds can also be less than bank loan interest rates. It allows UPS to receive funds from an

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investor to put back in the company to help it grow. It is attractive to the investor as they receive

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money back on interest payments as UPS pays back this loan. Looking at the data, a 3% interest
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rate is certainly more attractive for UPS as they would receive a larger investment based on the

present value. However, it may not be appealing to investors due to the low payments and less of
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a payout based on the future value. On the opposite scale, 7% would be better for investors but
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not so good for UPS. Investors would receive far more money than 3%, but UPS would receive

less and payout more money. The bond at 5% would allow the two to meet in the middle and
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give UPS a reliable investment, while investors would see a great return. Completing the bond

Issuance at 5% would allow UPS to attract a large number of lenders efficiently and enable them
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to operate as they see fit (Smith, 2020).

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Reviewing these bond calculations, one would wonder if this would fit UPS's company's

strategies and goals. The goal would be to determine what the bond for UPS would be used for
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within the company. A great example would be UPS's need to increase their trucks as they hire

more drivers during busier times like the holiday season. Offering the right rate for the bond

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would attract those investors and allow for UPS to increase their line of trucks as their operations

increase. The bond market provides UPS several ways to borrow money instead of bank loans

but can be risky for investors (Smith, 2020). Investors will want to be aware of using their

money to make sure UPS is making appropriate use of the funds. If UPS doesn't provide a valid

reason for increasing their supplies to help with operations, it could damage their reputation with

issuing bonds. This would decrease the number of investors for UPS. They would also need to

ensure a fair payout to investors as the calculation of 3% could prove too little and not attract

enough investors. Thus, UPS would be unable to gain the needed funds for their truck supply.

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Like a stock, the value of a bond determines whether it is a suitable investment for a portfolio

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and hence, is an integral step in bond investing (Chen, 2020, February 25). By completing the

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bond valuation, UPS would be able to determine the appropriate amount and interest rate to
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attract investors while also providing them the necessary funds to complete the given task.
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References

Chen, J. (2020, February 25). Bond Valuation: What's the Fair Value of a Bond? Retrieved

October 10, 2020, from https://www.investopedia.com/terms/b/bond-valuation.asp

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Chen, J. (2020, January 31). Learn about Shares Outstanding. Retrieved October 08, 2020, from

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https://www.investopedia.com/terms/o/outstandingshares.asp
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Chen, J. (2020, July 30). Dividend Per Share (DPS). Retrieved October 08, 2020, from
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https://www.investopedia.com/terms/d/dividend-per-share.asp
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Chen, J. (2020, July 18). Dividend Yield Definition. Retrieved October 08, 2020, from

https://www.investopedia.com/terms/d/dividendyield.asp
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Chen, J. (2020, September 26). Understanding Dividend Policy. Retrieved October 08, 2020,

from https://www.investopedia.com/terms/d/dividendpolicy.asp
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Smith, L. (2020, October 01). Why Companies Issue Bonds. Retrieved October 10, 2020, from

https://www.investopedia.com/articles/investing/062813/why-companies-issue-bonds.asp
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