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Which TWO of the following may explain the forecast rise in Chad Co’s earnings?
A. A decrease in dividend payout
B. Management myopia
C. A share repurchase program
D. An expected fall in interest rates in the economyI chose A and D, however, the correct answer is A and B.
I thought a fall in interest rate would lower the cost of borrowing and so, higher earnings.
By the way, can you tell me where the management myopia is covered? I have looked for it in the study text but could not find it.Thank you in advance, Iniss.
First of all myopia just means short term thinking
Can you give me more of an extract from the question please
I presume it shows an increase in earnings…….
If it does then the answer is A & C
A – your obviously happy with
and C – a share repurchase prog involves a co buying back its own shares from the market, this reduces the amount of outstanding shares, which can increase EPS and potentially boost earnings.The following information is available for Chad Co:
Current annual earnings $13,840,000
Forecast annual earnings $15,140,000
Listed companies similar to Chad Co have an earnings yield of 8.2%.Chad Co also has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6% per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per year.
Chad Co has no other debt in issue.For option D, I think only EPS would increase with total earnings staying the same or even lower since the company would have to spend some on purchasing them back.
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