Earnings Per Share

The company has had adequate profitability over the previous years that have helped investors earn a pleasant return on their investments. The basic earnings per share and the diluted earnings per share have both increased over the last four years, but both decreased ever so slightly in the current year. This decrease in the earnings per share is most likely due to the considerable decrease in net income for the current year. But Dick’s Sporting Goods has been managing their earnings per share through share buy backs which is

If we assume that earnings will be unchanged due to the repurchase then for P/E ratio to increase, then earnings per share must increase from 2.1 (35.25/16.8) to 2.58 (43.36/16.8). If this occurs then there is no change in P/E ratio, however, if earnings per share are less than 2.58, P/E ratio will increase and if earnings per share are greater than 2.58, then P/E ratio will decrease. Currently the company’s P/E ratio is better than Standard Auto but worse than Reliance Parts and Allied Motors.

Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

- A firm has a market value equal to its book value. Currently, the firm

Like several companies, Nortel stipendiary their executives with stock choices (Collins, 2011). This compensation solely inspired the tendency to be but honest regarding the company’s finances. author closely-held stock choices that solely inspired his actions to fulfill or beat the benchmark set by analysts. If Nortel’s earnings showed to be higher than the benchmark, Nortel’s stock costs would rise creating the stock closely-held by management to be even a lot of valuable. By tweaking the books to indicate the road earnings price as critical the allowable accumulation price he created the stakeholders assume that the corporate was creating extra money than it had been. “Nortel ne'er incomprehensible a benchmark over the sixteen quarters (Collins, 2011).” it had been too tempting to bump the numbers up so the stocks gave the impression to be value over they were. “Nortel’s accounting practices junction rectifier to AN investigation by AN freelance review committee, that found that insubordination with accumulation and accounting fraud were undertaken to fulfill internally obligatory earnings targets (Collins, 2011).”

Earnings per share (EPS)= Net income – pref. share dividends /Avg. number common shares outstanding

Eli Lilly is a profitable company and is one of the top pharmaceutical firms. The company has faced losses in the year 2008 but appears to have been recovering strongly. While Lilly has much lower earnings than its competitor, Pfizer, Lilly’s ROA and ROE are substantially higher than Pfizer. However, Lilly’s earnings fell by 14.2% in the year 2011, and ROA and ROE also fell during the period. Its P/E ratio fell substantially since 2008 due to the market’s lack of optimism about Lilly’s future. Lilly’s management is under considerable pressure to reverse the declining trend. Thus, management would have incentives to manipulate the areas of accounting that require judgment call like revenue recognition policies and valuation allowances to boost in earnings in 2011.

Berkshire operated on an EPS financial measure system early on, with a bottom-up planning process to find earning targets among the four divisions. Top management believed it to be important to meet the analysts’ EPS expectations; therefore, targets were set together with a 10% profit reserve at the corporate level. Senior management, which consisted of 40 of the 3,500 employees, had a yearly incentive plan for the division or corporation, covering 20-90% of their base salary. Berkshire was a public held company and shareholders were concerned about the existing plan. Shareowners and manager’s interests were not aligned, as the EPS was rising but the share prices were not. Shareowners were concerned that EPS was not a good performance measure, as management mantra was to maximize shareholders value. Bonus awards were also a concern, because they

Repurchasing shares and issuing new debt increases a firm's leverage by increasing fixed costs (through interest and premium payments on the debt) and decreasing the number of shares/shareholders, which increases the value of all shares (all else being equal) yet which over the long-term magnifies the changes in share price (Bierman, 2003). This would be advantageous to the firm and to shareholders at a time when revenue and profits re expected to be high, as the consolidated equity will result in higher per-share earnings (good for investors) and abundant cash flow for the company to pay off fixed costs (including the new debt) and to reinvest in further growth and other company areas (Bierman, 2003).

Blaine’s financial posture was very conservative as they have only twice borrowed beyond seasonal working capital needs. Although the company has very conservative roots it is important that they realize the need to acquire leverage and buy back stock. The shares outstanding have amplified, which has consecutively increased their payout ratio to an outstanding more than fifty percent of their net income being spent on dividends. It is very important that Blaine’s overturns the dilution of the shareholders percentage of ownership and put a stop to the trend in their payout ratio as it is unsustainable. The primary advantage to the repurchase of stock is that stock holders that remain will have a higher owner percentage (presumably the family member won’t sell their stock) and therefore the payout ratio can descend and earnings per share can ascend.

Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share

Another option Linear Technology has to exercise its excess cash balance, they can repurchase shares to increase the value of the firm. This repurchase option is beneficial to the company and shareholders because in an open market share repurchase has no effect on the stock price. In addition, by repurchasing shares the firm’s earnings and earnings per share will increase. As shown in Exhibit B, by calculating the total numbers of shares repurchased (total cash balance/price per share) and subtracting it from the number of shares outstanding will give us the number of shares left outstanding after the repurchase to be 261,703,052. Exhibit B shows how this decrease in the number of shares drove up the earnings per share value by $0.10 from $0.55 to $0.65. When the company repurchases shares instead of paying out in special dividends, the firm’s value will increase and it also allows the firm to retain its cash reserves within the company.

When companies reach higher degrees of success, they will eventually find themselves in the position that they are generating more cash they can reasonably reinvest in the business. The financial crisis has caused investors to pressure companies to distribute the accumulated wealth back to shareholders. Typically, companies can return wealth to shareholders through stock price appreciations, dividends of stock buybacks. In the past, dividends was the more common form of wealth distribution. However, as corporate america becomes more progressive and flexible, a fundamental shift has occurred in the way companies deploy capital. Instead of a traditional dividend payments, buybacks have been viewed as a flexible practice of returning excess cash flow. Buybacks can be seen as a signal as an efficient way to put money back into its shareholders pockets, as recently demonstrated by Apple’s capital return programs.

Managers may believe the company is currently over-valued, as they have previously been delaying the asset write-off, and artificially inflating earnings in the meantime. However, there may be endogeneity problems with such a conclusion, as the observed patterns of insider information may be due to a firm’s concerted share buyback strategy rather than earnings management.

According to the Thomas Jeffery Hogan and R. David Mautz, Jr., “Earnings per share (EPS) is considered by some to be the single most important item in the financial statements” (Hogan and Mautz, Jr., 1991, p. 50). Reasons for this are that they are known to be disclosed in statements of public companies as well as a figure auditors refer to. However, earnings per share may not really be the number investors should look at. Concepts Statement #2 requires that in order for information to be useful, it must be relevant and reliable. There seem to be problems with EPS due to the way it is computed and disclosed. Such problems consist of determining what constitutes common stock