Question

Assume that you are the CFO of a company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings, which may cause the stock price to fall prior to the announcement of the proposed stock repurchase.

What course of action would you recommend to your CEO? If your CEO came to you first and recommended reducing the current quarter’s earnings, what would be your response?

Your initial posting should be 250-500 words.

Answer 1

As a matter of ethics and proper business conduct, I would recommend to the CEO to not undertake any accounting tweak to reduce the quarterly earnings to drive down the share price. This is based on the fiduciary duty that the management has towards the shareholders. Also I would inform the CEO that if the news of the share repurchase is released to the market, then the stock price would any way rise and any effort to tone down the earnings would have negligible impact.

In case I have to oblige the CEO and reduce the current quarter earnings, following options are available:

• Deferring the income to the next quarter from the current quarter thus reducing net earnings.
• Pre booking some of the expenses of the year can also lead to reduction in earnings.
• Pre-booking and payment of income taxes can reduce the net earnings through increased tax outflow.
• Also finance costs and interest charges may be booked in advance and paid to creditors which can also reduce the earnings.

Thus the above techniques are available which can result in subdued earnings for the quarter just before the share repurchase is announced.