Topic: Earnings per Share

Xerxes, Inc. has reported steady growth and increased profits for the past ten years. Now the company management has noticed that growth has slowed. There is some concern that profits may be level with those from the previous year. The CFO knows that the shareholders have become accustomed to seeing increases in profits and EPS every year. He is concerned about the reaction to a no-growth year.

The CFO meets with the head of the controller to discuss possible solutions. The fiscal year-end is just three months away. The company's controller proposes a share buyback program, starting immediately. The CFO knows that there are better uses for the company's money but also knows that a share buyback would probably result in an increase to EPS over the previous year. It would be, at the least, a temporary "fix" to get through until the next year.

Explain how the share buyback would result in higher EPS. Examine the ethical implications of the action. If the company proceeds with the buyback, who would be impacted, and would it be a negative or positive impact? Is the short-term fix worth it? What are the long-range implications?

Note: This may or may not be ethical (I'm not saying) but don't immediately assume that it is. Keep an open mind and research the matter. If you can't get a clear-cut answer, then welcome to accounting. Things are often not clear; they are "gray", and you have to make the best decision you can.

**MAKE SURE ITS A ORIGINAL ANSWER***