Question

In: Finance

2. The stock repurchase is a decision by companies to buy their own shares in an...

2. The stock repurchase is a decision by companies to buy their own shares in an effort to help boost earnings per share and stock prices. A recent article published on WSJ (https://www.wsj.com/articles/companies-mull-suspending-ramping-up-share-buyback-plans-amid-coronavirus-11584477343) reported that finance chiefs are debating whether to make share repurchases or hold on to cash as stock prices fall on fears surrounding the coronavirus pandemic since the S&P 500 has plummeted about 25% from Feb. 18. Some companies appear to be taking advantage of the down market, announcing plans to scoop up shares. Others, however, have said they would suspend share buyback plans to preserve cash and exercise caution in an uncertain period. They argue that they need to stay sufficiently capitalized to resist financial hits from economic conditions spurred by the pandemic. In some instances, businesses have opted to raise cash by drawing down credit facilities with lenders. Why have selected companies decided to suspend their share repurchases? Why have other companies authorized share repurchases? If you were the CFO of a retail business like the Gap, what would you do? If you were the CFO of Oracle, what would you do?

Solutions

Expert Solution

  • Share repurchase is a short to medium term investment opportunity.
  • Share repurchases entail huge cash outflows.
  • Share repurchases help to boost earnings per share by decreasing the quity base.
  • Share repurchase helps in keeping the stock price stable in times of economic uncertainty..
  • Share repurchases help in increasing investor confidence.
  • Share repurchases also help in averting hostile takeovers.

Selected companies have decided to suspend share repurchases, possibly in order to conserve cash in times of economic uncertainty. It is possible that the managements of such companies believe that the investors are confident in their superior operational efficiencies.

Selected companies have decided to authorise shae repurchases, mainly to augment investor confidence, which has been taking a hit due to fledgling operational performance. It is also possible that the balance sheets of such companies have idle cash far in excess of their immediate requirements, or that there is dearth of viable or profitable investment opportunities.

If I were the CFO of Gap, a retail company for apparel, grappling with dismal operational performance, I would put share repurchase plans on hold for the time being, and preserve cash.

On the other hand, as CFO of Oracle, I would go for a share repurchase to take advantage of the current lower prices of shares. It is the best investment opportunity that my company has at the moment, in the medium term there could be huge profits earned by reissuance of the stock. So I want by idle cash to go to work. Naturally, that would contribute towards maximizing shareholder value.


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