Reference no: EM13129875
11. Many companies issue large numbers of stock option to executives and other employees. These companies frequently buy back some of their share on the open market. For example, Microsoft Corp., which until relatively recently was a major issuer of ESOs, bought back over $20 billion of its shares over a five-year period up to 2003. in February 2005 ConocoPhilips, a large oil company based in Houston, Texas, announced a $ 1 billion buy-back program over the next two years. ConocoPhilips was also a major ESO issuer.
Required.
a. Why would firms with large ESO plans buy back their stock? Explain.
b. Normally, companies that buy back their share do so over time, to avoid the increased demand building up share price, thus raising the cost of buying them back. As the shares are bought back, the company the records the reduction in outstanding shares and the cash payment. However, according to an article in the globe and mail (January 31, 2006, p. 813), Watch out for the loophole : buybacks have hidden cost, “(reproduced from The Wall Street Journal), many company have engaged in “accelerated share repurchase.” Under this tactic, firm record their total planned buyback all at once at their shares’ current market price, even though they have not yet bought back the share. The maximize the increase in current earnings per share. Would you, as a potential investor in firm using this tactic, be corcerned? Why or why not?
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