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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? Plus 400 words, citation format is APA
If I were the CFO of a company contemplating a stock repurchase next quarter, I would recommend to my CEO that we utilize one or more of the following strategies in order to reduce current quarterly earnings without causing an immediate decline in our stock price:
1. Expense Recognition Delays –The company can delay recognizing certain non-cash expenses for up to several quarters, thus reducing reported profits for the current quarter but not resulting in any permanent loss of actual cash. This strategy allows us to realize short-term savings and stabilize our stock price until the buyback is announced, while still adhering to Generally Accepted Accounting Principles (GAAP).
2. Purchase Price Deferrals– We can defer purchases and pay upon delivery later than originally agreed when possible. This will help us spread out our spending over multiple quarters, rather than incurring these costs all at once during this current quarter. Again, this strategy will minimize near-term profits without affecting our long-term financial health or permanently reducing cash holdings.
3. Cost Reductions/Efficiency Gains– Finally, we can look into realistic ways of cutting back on discretionary costs wherever possible while maintaining performance levels and quality standards in order to maximize profitability during the current quarter . Additionally, we can also explore opportunities where greater efficiency gains may be realized through process changes or streamlining operations across departments/ divisions within the organization which could ultimately lead to cost reductions as well as increased output over time . Both those strategies should help us remain profitable both now and in future quarters as well .
If my CEO came to me first and recommended reducing current quarter’s earnings as part of their proposed buyback plan , I would likely caution against such a move due its potential negative impact on investor sentiment towards our firm . As previously mentioned , there are more effective ways for us manage profitability without directly impacting market confidence such as expense recognition delays , purchase price deferrals , and cost reduction / efficiency gains which may yield improved overall results with less risk than cutting back deeply on profits at present time (Childs & Ahrens 2018) . In addition , I would advise exploring other alternative financing options if they have become available since last review; including reviewing debt financing arrangements with banks or other lenders who may offer better terms depending upon existing credit ratings and liquidity position within your business (Powell & Greer 2017). Ultimately though it’s important that any decision related to this buyback plan is made carefully – weighing both benefits and risks involved – given how sensitive investors are currently towards companies engaging in large scale capital allocation activities like this one today .