Your firm, where you are the new Chief Financial Officer (CFO), has had an inter
ID: 2647780 • Letter: Y
Question
Your firm, where you are the new Chief Financial Officer (CFO), has had an interesting year. For the entire year, you have been operating under the pressure of meeting a major EPS growth challenge. Prior to the start of the year, your Chief Operating Officer (CEO) committed to the investment community that your EPS would move from $2.20 in 2013 to $2.42 in 2014. This was based on target earnings after interest and taxes of $365 million. This is up from actual earnings of $330 million in 2013. The good news is that you are now at mid-year and you have projected that you will either hit the target or beat it by a small amount. Wall Street has been watching closely and really likes what they are seeing. As a result, your stock price has moved from a year-end $22 per share to $30 per share as of June 30th. Nearly all of the increase has occurred over the past two weeks. However, both Wall Street
Explanation / Answer
HI,
The simplest answer is to increase earnings or decrease the number of shares. In order to increase earnings, a business has to increase revenues, reduce expenses or both. In order to decrease the number of shares, do a share buyback from shareholders.
target earnings after interest and taxes = $365 million
Number of shares outstanding = 150 million
Number of new shares resulting from bond conversion = 10000/40
=250 shares
Number of new shares resulting from stock option = 1 million
Total number of new shares = (150000000+1000000+250)
=151000250 shares
New projected EPS = 365000000/151000250
=$2.41
Number of shares required to achieve a EPS target of $2.42 = 365000000/2.42
=150826446
Difference in shares = (151000250-150826446)
=173804 shares.
Hence, the company can buy back these number of shares to maintain its expected EPS
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