Week 4 Discussion

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National University College *

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401B

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Finance

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Apr 3, 2024

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docx

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Week 4 : Discussion What are some of the reasons that management purchases its stock? Explain how earnings per share might be affected by treasury stock transactions. Calculate the debt-to-assets ratio for the current year and the prior year and discuss the implications of the change. What are some of the reasons that management purchases its stock? Management's purchase its own stock for several purposes: -Signaling: When management purchases its own stock, it sends a message to investors that they believe the company's stock is undervalued. This act can inspire confidence among other investors, potentially leading to an uptick in the stock's value. -Capital Allocation: Through stock buybacks, a company can utilize surplus capital to enhance shareholder value. This strategy is particularly beneficial when management deems investing in the company's stock as yielding superior returns compared to other available investment avenues. -Earnings per Share (EPS) Enhancement: By decreasing the number of outstanding shares via buybacks, management can bolster the company's EPS. This is appealing to shareholders as it signifies greater profitability on a per-share basis. -Defense Mechanism against Hostile Takeovers: Repurchasing its own shares can deter potential acquirers by raising the cost of acquiring a controlling interest, thereby making the company less appealing for takeover bids. Explain how earnings per share might be affected by treasury stock transaction. Earnings per share can be influenced by treasury transactions, as they have an impact on EPS in the following ways: -Reduction in Outstanding Shares: The repurchase of shares decreases the total number of outstanding shares. Since EPS is calculated by dividing net income by outstanding shares, reducing the denominator increases EPS, assuming net income remains steady. -Effect on Net Income: When treasury stock is subsequently sold back into the market, any gains, or losses from the transaction influence the company's net income. Selling treasury stock at a higher price than it repurchases cost yields a gain, boosting net income and, consequently, EPS. Conversely, selling at a lower price result in a loss, reducing net income and EPS. Calculate the debt-to-assets ratio for the current year and the prior year and discuss the implications of the change.

Debt to assets ratio = Total liabilities / Total assets For the current year: Debt to assets ratio = 11,867 / 15,474 = 0.767 or 76.7% For the prior year: Debt to assets ratio = 12,302 / 15,153 = 0.812 or 81.2% The comparison between the debt to assets ratios for the prior and current years reveals a decline from 81.2% to 76.7%. This indicates a reduction in Kellogg's reliance on debt relative to its total assets. Typically, a lower debt to assets ratio signifies diminished financial risk and a stronger financial standing. It suggests that the company has decreased its dependency on debt financing and likely improved its capacity to fulfill its financial obligations. Nonetheless, evaluating the implications of this change accurately requires considering the specific conditions within Kellogg's industry and market. Boyt-White, C. (2022, July 20). When Does It Benefit a Company to Buy Back Outstanding Shares? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/040815/what- situations-does-it-benefit-company-buy-back-outstanding-shares.asp

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