Question

The Pear Corporation makes and distributes PC’s and various peripheral devices to the Global Technical Consumer market. The company’s global performance has been excellent and has driven their stock price substantially above the preferred trading range of $50 per share and the company’s board of directors is contemplating a strategy to reduce the stock price.

They are considering either a stock split or stock dividend strategy to develop more shareholder wealth and at the same time lower the stock’s trading price to a more normal and affordable trading range. As the investment banker for the Pear Corporation you must recommend the best financial strategy for them that will:

A. A. Lower the stock price and allow for more trading volume.

B. B. Enhance current shareholder wealth

C. C. Keep the long-term growth prospects for the company intact.

Please provide some reasons for you decision and what the long-term effects will be for the Pear Corporation.

Answer 1

I will select the following recommendation=

C – Keep the long term growth prospects for the company intact. –

The performance of the company is quite good and it resulted in an increase in the stock prices. The main benefit of the long term investment is that it overcomes the issue of personal emotion. While in the case of the short term investment, the increase and decrease in the stock value may create the investor to think insanely. When the investor invests in the long term, it has patience and wisdom. There will be no need for Pear Corporation to lower the stock price for greater trading volume to gain higher profit. This can result in improved shareholder wealth. This will also have some tax benefits. In comparison to an active trader, a long term investor has to pay lower taxes. Short term traders can be seen as those individuals who hold the shares for a period of 365 days or less and they pay tax at the top marginal tax rate which could range from 10% to 40%. While in the case of long term investment, the tax range is 0%, 15% or 20% which depends on the income. Thus holding the stocks for more than a year will be seen as a profitable action.

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