Question

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.

• 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?

Answer 1

1. First, we need to know what a stock repurchase is, it refers to a firm's purchase of its own stock, an alternative to a cash dividend. They have become very popular for businesses. Aggregate real dividends have grown relatively steadily through time, but repurchases have exploded in the last two decades.

With that being said it would be my responsibility to ensure the financial safety for the company. I would need to make sure this would be the right move without causing a decrease in earnings but if this would make an increase then it would need to be considered. However, the current market needs to be considered, as this will effect our decision.

2. I would recommend that we do a great deal of research and analysis of the current market. There will be a need to make a strategic plan to decrease the earning, possibly halting some areas of the company that may not be performing as well. This is known as a ‘earnings game’, While quarterly earnings results evoke market reactions, any negative impact on stock prices is mostly short-term. Using the same set of historical data in this exercise, the stocks that lost value in three days, as a result of negative market response, eventually recovered after 30 days with an average return of 6.14 percent. I would say playing this game is risky but after reviewing our numbers and all looks good, then I would go with it.