Question

Robin Peterson, the CEO of Teldar Incorporated, was reviewing the financial statements for the first three months of the year. He saw that sales and net income were lower than expected. Because the reported net income and the related earnings per share were below expectations, the price of the stock declined. Robin held a meeting with top management and expressed his concerns over the declining trend in sales and income. He stated that the reduced profitability meant that he needed to formulate a plan to somehow increase the earnings per share. The vice president of marketing suggested that more advertising might help sales increase. Robin stated that spending more money on advertising would not guarantee an increase in sales. Then he announced that the excess company cash would instead be used to buy back shares of outstand ing common stock; this move would help increase the earnings per share because fewer shares would be outstanding. Robin reminded everyone that the yearly financial statements would be analyzed and the current year would be compared to previous years' results. He then stated that the treasury stock would lower the total stockholders' equity, which could then provide a stronger EPS so the current year would not look as bad. Finally, Robin reminded everyone that with fewer shares of stock outstanding, the dividend per share could be increased and that would help make Teldar stock more attractive. The CFO argued that buying back stock merely to increase perfor mance measures such as EPS was manipulative and unethical and financial analysts would easily see what Teldar was trying to do.
Why did the CEO want to repurchase shares of Teldar common stock? Would the repurchase of common stock really have any impact on the financial ratios? Would an investor or financial analyst be able to see that financial performance measures were improved because of the stock repurchase? Are any ethical issues involved? Were the concerns expressed by the CFO valid? Do you have any other thoughts?



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  • CreatedApril 29, 2014
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