The Financial Engineer's Most Versatile Tool Dissertation - 1

The Financial Engineer's Most Versatile Tool - Dissertation Example The EPS graph of the company has been shown for a five year period to highlight the rise in the earnings per share due to a stock repurchase program. The deterioration in the important financial ratios like interest coverage, return etc has also been shown with the help of suitable graphs. An announcement of a share repurchase by a company is valued highly by the market participants interpreting it as a ‘buy signal’ for its stock. So the company has good reasons to buy-back its stocks but sometimes these share buyback programs go awry. Despite the popularity of such programs as evident from the recent buyback deals, there are concerns whether the firm or the shareholders derive any gains from it. One reason favoring the buyback deal is that at any point of time the surplus cash lying with the management can be used for buyback of shares thereby returning the funds to the shareholders. It has been seen that idle cash makes the managers complacent so buying back of shares can be one way of instilling confidence among the investors. From the viewpoint of the company stock buyback results in increased Earnings per share (EPS), share price and increases the value of â€Å"executive stock options† (Ogilvie, 2006, p.51). However, the share buyback strategy can be dangerous if the company finances the buyback of equities using borrowed funds. Financing buyback using loan stock may look tempting in the short term but some years down the line the company has to pay back the loan. In the event of an economic recession, the company will have to struggle with fund shortage. A rise in the share price, the increase in company EPS are all good signs but not at the cost of endangering the position of the company in the future. The board of directors must keep the interests of the shareholders in mind while considering share buyback programs. Significant research has been conducted especially in the area of share repurchases.