Consider Whirlybird, Inc. offers helicopter tours and transportation in major cities around the ... Consider Whirlybird,...

Consider Whirlybird, Inc. offers helicopter tours and transportation in major cities around the ... Consider Whirlybird, Inc. offers helicopter tours and transportation in major cities around the world. The company is considering a stock repurchase in the upcoming quarter. As the Chief Financial Officer (CFO), you understand there are several methods to reduce quarterly earnings, which could reduce stock price prior to the announcement of the proposed stock repurchase.

Discuss

What course of action do you recommend to the Chief Executive Officer (CEO) of Whirlybird?

If the CEO approached you recommending a reduction in current quarter earnings, how would you respond?

Solutions

Expert Solution

Answer 1: - In the recommendation to the CEO, an advise can be provided to estimate the current market expectation regarding the expected growth in the upcoming quarterly earnings of the company because it will help in estimating the expected stock price movement which is our concern. And if actual growth shown in the upcoming quarter is less than the market expectation then it will lead the stock prices to fall before the repurchase program.

Answer 2: - Though the responsibility as a CFO demands the actions with regards to increment in the earnings of the company but such situation calls for a different action. So in the recommendation to the CEO, an advise can be provided regarding that the management earnings forecasts or guidance should provide a hint of downward trend before the start of repurchasing and the management should provide a sequence of biased earnings guidance ( indicating downward trend) during the length of the repurchase program and then to sustain the guidance throughout the process. It will help in reducing the market estimation of stock prices which will help in reducing the stock price. As an example company can make a big investment during that period which will cost a great deal to company and will affect the earning estimate in the short run ( which will be beneficial for stock repurchase) and also will help the company in the long-run.

jeff jeffy answered 1 year ago

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