Kellogg Company is the world’s leading producer of ready-to-eat cereal products.
ID: 2416148 • Letter: K
Question
Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.
1.What are some of the reasons that management purchases its own stock?
2.Explain how earnings per share might be affected by treasury stock transactions
3.Discuss the implications of the change by calculating the ratio of debt of assets for 2010 and 2011.
2011 2010 Net sales $13,198 $12,397 Net income 1,229 1,240 Total assets 11,901 11,847 Total liabilities 10,139 9,693 Common stock, $0.25 par value 105 105 Capital in excess of par value 522 495 Retained earnings 6,721 6,122 Treasury stock, at cost 3,130 2,650 Number of shares outstanding (in millions) 357 366Explanation / Answer
1) Stock buybacks refer to the repurchasing of shares of stock by the company that issued them.
There are many reasons why management decide to purchase its own stock is:
- Companies mainly issues shares to raise its capital for expansion or growth, but if there is no vision for growth left in near future then there is no need to issue capital but to reduce its capital by buy back the shares as they will demand return on investments whereas there is no scope of growth and expansion which fulfills that and it unecessary increases the rights of the companies in many hands because every share has a voting right.
- Another major reasins why company buy back its share is because of under valuation of shares. if in market share price is fall due to no. of reason then company can take benefit of this temporary situation to buy back its equity in a very low price thus can decrease the rights in the companies as well as sharing of profit.
2) Earning per share is directly proptional to Treasury stock as the treasury stock increases like wise earning per share will also increase because treasury stock consist of shares which company buy backs , or in simple words if there is a profit of $1,000 and it was to be distributed among 100 share holders but due to buy back of 10 shares in treasury stock it will be going to be distributed among 90 shares thus earning per share will increase from 10 per share to 11.11 per share.
3) Debt Ratio = Total Liability / Total Assets
2010 = 9,693 / 11,847 = 0.82 : 1
2011 = 10,139 / 11,901 = 0.85 : 1
A lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has lower overall debt. .A ratio of 1 means that total liabilities equals total assets. In other words, the company would have to sell off all of its assets in order to pay off its liabilities. Obviously, this is a highly leverage firm. Once its assets are sold off, the business no longer can operate.The debt ratio is a fundamental solvency ratio because creditors are always concerned about being repaid. When companies borrow more money, their ratio increases creditors will no longer loan them money. Companies with higher debt ratios are better off looking to equity financing to grow their operations.
As the debt ratio is increased from 0.82 to 0.85 it means that debt on the company is keep on increasing which may lead to increase the fixed cost burden on the company thus leads to low profits. if there is a groth ptential in the market then company must go for eyity financing and reduce the debt ration and increase its profits by taking the benefits of growth or pay off its debt in order to reduce fixed interest cost.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.