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 shares 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 outstanding common shares; 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 shares would lower the total shareholders’ 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 outstanding, the dividend per share could be increased and that would help make Teldar shares more attractive. The CFO argued that buying back shares merely to increase performance 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 shares? Would the repurchase of common shares 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 share repurchase? Are any ethical issues involved? Were the concerns expressed by the CFO valid? Do you have any other thoughts?