PLEASE PROVIDE A COMPLETE WRITTEN ANSWER Kellogg Company is the world’s leading
ID: 2419616 • Letter: P
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PLEASE PROVIDE A COMPLETE WRITTEN ANSWER
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.
What are some of the reasons that management purchases its own stock?
Explain how earnings per share might be affected by treasury stock transactions.
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
Some of the reasons that management purchases its own stock:
Essentially, a buyback occurs is when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.
Since companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back.
However, there are numerous reasons why it may be beneficial to a business to repurchase its shares, including ownership consolidation, undervaluation and boosting financial ratios.
Another major reason why businesses repurchase their own shares is to take advantage of undervaluation.
How earnings per share might be affected by treasury stock transactions:
Earnings per share (EPS) does not directly affect treasury stock transactions; but treasury stock transactions do affect EPS. The formula for EPS is:
Net Income / Avg. Shares Outstanding = EPS
So when treasury stock is purchased the shares of stock outstanding decreases and EPS increases. When treasury stock is resold the shares of stock outstanding increases and EPS decreases.
EPS can indirectly affect treasury stock transactions. If a company has a high EPS, the market price of the stock could conceivably increase. This would increase the price of the treasury stock when it is purchased or resold. If the EPS is low, it could decrease the price of treasury stock.
Ratio of Debt Assets-
Total liabilities divided by total assets
Particulars
2011
2010
Ratio =
10,139/11,901
9,693/11,847
Ration is
0.852
0.818
Ratio of Debt Assets-
Total liabilities divided by total assets
Particulars
2011
2010
Ratio =
10,139/11,901
9,693/11,847
Ration is
0.852
0.818
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