The Impact Of Financial Leverage On The Payoffs Of Stockholders And Market Value

The Impact Of Financial Leverage On The Payoffs Of Stockholders And Market Value

Length: 714 words (2 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

Original Work Statement
“I, Awoundan Eyimin, verify that this article review is solely my own work and creation and it has been prepared solely for credit in this class, and that this review, including the “main issue of the article” section has been written in my own words.”
Article Citation
Negi, P., Sankpal, S., Mathur, G., & Vaswani, N. (2012). Impact of financial leverage on the payoffs to stockholders and market value. IUP Journal of Accounting Research & Audit Practices, 11(1), 35-46. Retrieved from
Main Issue of Article
This article reviews a study done on 50 companies listed on NSE and BSE—10 each from the auto, cement, FMCG, oil and gas and pharmaceutical industries in India. The purpose of the study is to evaluate the impact of financial leverage on shareholders’ return and market value. The 10 companies selected in each industry are equally divided into two categories: low leverage companies and high leverage companies. Shareholders’ return is computed through earnings per share and return on equity ratio. As for market value, it is measured through the dividend payout and price-earning ratio.
The results showed that financial leverage has little to no effect on earnings per share of high-leverage companies of Indian auto, cement, FMCG, oil and gas and pharmaceutical industries but has an impact on earnings per share of low-leverage companies of auto and cement industries in India.
Relationship to Course
This article relates to a few key notions reviewed in chapter 1: shareholders’ value and capital structure, which the mix of debt and equity on which a firm relies. . The ultimate goal of managers is to maximize shar...

... middle of paper ...

...hich raises capital through debt financing is believed to have favorable prospects whereas a firm which raises capital through equity financing is believed to have unfavorable prospects.
I believe financial managers have to be very careful about the decisions they make when choosing to either finance through debt or equity. Though it may seem more profitable to do so through debt, there is a cost associated with it and the motive behind choosing either one should be in my opinion which one between the two options will lead to a long-term growth and be sustainable under economic conditions. One thing I also understand from this article is that opting for debt over equity financing as the best way to balance the interests of all stakeholders and increase value for shareholders depends on the type of industry the firm operates in and how leveraged the firm currently is.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Ad Management and the Recent Turmoil in Financial Markets Essay

- ... A particular insight can be drawn from the United Bank of Switzerland (UBS) report of 2008 which showed how employees were compensated with strong incentives to use UBS capital to invest in high yielding mortgage-backed securities. Whilst this was, they failed to provide sufficient incentives to protect the company, hence, mismatching priorities. This would not have proved costly if only the senior managers of the firm were wise enough to put in place strong risk measurement and control system....   [tags: financial crisis, housing and mortgage crisis]

Better Essays
1358 words (3.9 pages)

Financial Market And Its Types Essay

- In this paper I would discuss about the financial market and it 's many types and discuss how it affects the financial market, but before we can discuss about the market we must first know what the financial market is first. The financial market is a market where people of the same or different nationality would trade financial securities and other fungible items of value at slightly lower transaction costs and at prices that are at equal with the supply and demand at that time. For the people who may or may not know security are a tradable asset which are stocks and bonds while commodity are items that help satisfy the needs and wants of people commodity in the financial market includes pre...   [tags: Bond, Debt, Stock exchange, Financial market]

Better Essays
1571 words (4.5 pages)

Financial Analysis : The And Capital Structure Leverage Essay

- Financial Analysis Relevant ratios: Profitability: ROE 2010 2011 2012 2013 2014 Kathmandu (KMD) 11.1% 15.7% 12.9% 16.4% 13.6% Billabong 12.1% 9.8% 3.1% 0.0% 0.0% Return on Equity for KMD is relatively higher than its Cost of Equity (12.355%) as well as its comparable competitor Billabong, even though there is some level of fluctuations between 10% and 17% over the year. Even though ROE is higher than cost of equity, the current market equity is lower than its book value. This is due to the fact that there is a reduction in ROE in 2014, the under-expected performance reported in the interim report 2015....   [tags: Generally Accepted Accounting Principles]

Better Essays
1645 words (4.7 pages)

Proposed Research in Financial Market Simulation Essay

- With the widely emerging electronic platforms in financial market for the exchange of all types of financial instruments (i.e. securities, derivatives, commodities and futures), the electronic centralized order book has become the standard market mechanism for price discovery in today’s financial markets. As a result, many investors now employ algorithmic trading to automatically make trading decisions, submit orders, and manage those orders after submission. Algorithmic trading is the use of computer software to help make and execute trading decisions based on some pre-programmed computer algorithms [1]....   [tags: financial market,algorithmic trading,sharpe ratio]

Better Essays
814 words (2.3 pages)

Financial Market: Volatility Models Essay

- ... This project is organized as follows; sections 2 to 5 are a simple summary of the key references that I have received. Section 6 includes some personal comments about the overall literature studied and finally, Section 7 is a briefly conclusion of the topic. 2. A Forecast Comparison Of Volatility Models: Does Anything Beat A GARCH (1,1). In this paper, they wanted to know if some sophisticated volatility models work much better than the naive GARCH (1,1) when trying to capture the conditional variance, therefore they propose 330 GARCH-type models in order make a ranking of which ones perform better....   [tags: ARCH model, market prices, chapter analysis]

Better Essays
1800 words (5.1 pages)

Financial Investment At The Stock Market Essay

- QUESTION 1 (i) Security markets refer to any type of financial investment at the stock market. A security market encompasses; equity markets, bond markets, and derivatives markets. Only a few companies in East Africa are enlisted at the stock exchange due to the technicalities of listing companies and the disadvantages that comes with it. Enlisting a company at the securities exchange market has advantage and disadvantages. The following are some of the advantages and disadvantages of enlisting a company at the securities exchange market; Advantages of Enlisting a Company at the Securities Exchange Market (a) Free Coverage and Publicity; Enlisting a company at the securities exchange market...   [tags: Stock market, Stock exchange]

Better Essays
1382 words (3.9 pages)

Credit Unions And The Financial Market Essay

- Graduate Research Paper: Credit Unions in the Financial Market Literature Review Knowing the history of credit unions and how they were originally structured, it is important to understand where credit unions will be going in the future. It is anticipated that there will be less than 3,000 credit unions in the next 25 years. This is down considerably compared to the more than 6,000 existing credit unions in 2015 (Strozniak, 2015). Competition for credit unions will continue to be other financial institutions and financial services providers, but there will also be competitors entering the market, such as Peer-to-peer lenders and other fintech start ups that will begin to take over some of th...   [tags: Economics, Monopoly, Bank, Financial services]

Better Essays
1095 words (3.1 pages)

Essay on The Market Integration And Financial Globalization

- The US capital market is considered as the largest and most liquid market in the world. As summarized in the study of Hail and Leuz (2009), the advantage of cross-listing on US exchanges over other exchanges can be attributed to the following reasons. First, 4In this study, ‘financial market integration’ and ‘financial globalization’ are treated as interchangeable term. 17 outside investor protection is strengthened, which allows firms to raise external finance more easily (e.g. Reese and Weisbach, 2002; Benos and Weisbach, 2004; Doidge et al., 2004)....   [tags: Stock, Stock market, Stock exchange]

Better Essays
794 words (2.3 pages)

Essay on Security For Financial Market Investment

- These are the most known security for financial market investment. This type of security represents the practice of ownership in a specific company. The fact is that ownership of particular firms end up being divided within a number of stocks according to shares. Stocks tend to share a tiny fraction of any firm. The stock holds a tiny fraction of ownership of the firm whereby it holds itself in such a right position to take part in the decisions of the firms. Net profit in a company is divided in two destinies such as through investment of the profits on the firm....   [tags: Stock, Stock market, Mutual fund, Stock exchange]

Better Essays
1012 words (2.9 pages)

Financial Markets and the Risks They Run Essay

- Financial Markets and the Risks They Run Outline the differences between a broker and a dealer (or marketmaker) in financial markets, including discussions of how they are remunerated and what risks they run. A financial market consists of diverse financial assets traded between buyers and sellers. In addition to enabling exchange of previously issued financial assets, financial markets make possible the borrowing and lending by facilitating the sale by newly issued financial assets. Examples of financial markets include the New York Stock Exchange (which is involved in the resale of previously issued stock shares), the U.S....   [tags: Financial Markets Institutions Finances Essays]

Free Essays
415 words (1.2 pages)