Retain Earnings and Stock Divident distributions

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QUESTION
Retained Earnings and Stock Dividend Distributions
Stockholders often look at trends in a company’s retained earnings to help them decide whether to invest. Retained earnings can be a good indicator of how healthy a company will be in the future. Therefore, a company might be motivated to make these retained earnings appear as high as possible.
For this week’s Discussion, look at the retained earnings of the companies that you selected in Week 1. How attractive are the retained earnings to investors? Can the company improve the appearance of these earnings and still comply with GAAP and ethical standards?
With these thoughts in mind:
Write at least 200 words answering the following questions:
1. How might the companies you selected in Week 1 (Microsoft and General Motors – see below prior week posting ) attract more investors by improving the appearance of these trends, while still complying with GAAP and ethical standards? In your opinion, what are the key components of retained earnings that should be addressed? Why?
2. Identify and discuss two factors that might influence a company’s decision to make a large or small stock distribution. When does it make sense to do a distribution? Why?
For your reference:
Week 1:
Exploring capital structures
Capital structure varies from one entity to another depending on the goals and needs of each business organization. There are various factors that influence how a company might build its capital structure at any one given time. The first factor is interest in how the company is controlled. Companies that intend to control decision making will tend to raise funds through debt than equity financing and vice versa. Sometimes companies are influenced by their desire to be prepared to counter any emergencies that may arise. In this case they will choose debt over equity because equity is less responsive (Baser, Brahmbhatt & Joshi,2012). The prevailing economic situation also influence a company’s capital structure. During bullish runs at the stock exchange firms tend to prefer equity to debt financing while during bearish runs they prefer debt financing. Organizational financial performance influence capital structure as well. Firms that are not doing fairly well prefer equity financing as equity financiers do not demand for scheduled repayments unlike debt financiers and vice versa. Another factor is financial, operational and business risk considerations. If the risks are projected to be very high then firms tend to prefer equity financing to debt financing (Wang,2013).
Another factor that determines capital structure is debt and cash flow considerations. Interest rate changes also impact on the capital structure decisions as well as debt and equity financing considerations. The size of an organization has a huge influence on the capital structure. A large company like Microsoft is able to negotiate for lower interest rates than a small company and hence will have a large portion of its capital structure in form of debt. A large company can easily raise additional capital through equity investors as it has a large pool of shareholders. A small company however , will find it a bit hard to raise equity financing as the pool of its investors is small (Wang,2013). Small companies have a big portion of financing from debt financiers. The differences between the two companies I have selected is that big companies such as General Motors have various forms of equity financing as well as debt financing while small companies have limited sources. Infact most of the financing is inform of secured loans and shareholder loans. There are various factors that a company should consider in deciding the classes of stock it should issue. The first is the controlling interest as there are stock classes that do not have the right to vote to influence company decisions. The second one is cash flows as there are stock classes that demand preference in payment of dividends such as preference stock holders (Wang,2013).
References
Baser, N., Brahmbhatt, M., & Joshi, N. (2012). CAPITAL STRUCTURE DECISIONS OF
INFRASTRUCTURE COMPANIES: AN INVESTIGATION OF FINANCE EXECUTIVES.Prestige International Journal of Management and Research, 4/5(2), 10-17. Retrieved from https://search.proquest.com/docview/1514239323?accountid=45049
Wang, Z. (2013). Optimal capital structure: Case of SOE versus private listed
corporation. Chinese Management Studies, 7(4), 604-616. doi:http://dx.doi.org/10.1108/CMS-09-2013-0169

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