Critical Exchange Forum Responses

In addition to students)nitial critical exchange forum comments, students are also expected to actively participate in the in the forum discussion. Active participation requires a minimum of two forum logins on two separate days. Thus, a minimum of three logins on three separate days is required to earn full credit. Forum response participation posts require a minimum of 150-250 words to earn full participation points.

Guidelines for student forum discussion/participation: 

Select a fellow student’s response and compare and contrast your thoughts with theirs;

Advance the conversation; provide a real-world application and experiential examples;

• Conceptually discuss your key [most significant] learning insight or take-away from the selected forum topic comments.
• Responses should be a minimum of 150-250 words, supported by at least one reference outside of the textbook, either supporting or refuting the position of the author of the forum topic response or peer response.
• Barbara ToliverBarbara ToliverTuesdayMar 21 at 7:19amManage Discussion EntryGood Morning,Please see my discussion post below!Share RepurchasesShare repurchasing occurs when companies buyback its own shares of stock that was previously sold to the public. A company can sometimes choose to buy back their shares of stock after considers them undervalued or for a price below the true value. When the company buys the shares from the marketplace, the company has an opportunity to offer its shareholders the option of tendering their shares directly to the company at a fixed price. Management can choose to repurchase stocks as a way to let potential investors now the stock price is likely to increase. Also, reducing the number of outstanding shares by repurchasing can drive up the prices as well. Finally, companies may decide to repurchase shares in an attempt to halt declining stock price or increase equity. Companies also choose to repurchase stocks when they have extra cash on hand and the market is performing well. One interpretation of a buyback is a financially healthy company that no longer needs excess equity funding and the companies-anagement team has enough confidence to reinvest in itself (Banton, 2022).  When a company repurchases shares, the total number of available shares in the marketplace decreases, setting off a chain of events. To start the earnings per share (ESP), and cash flow per share (CFPS) will increase because the available shares used to produce figures will have decreased. This artificial inflation can scare off potential investors because the sudden increase in ESP and CFPS is not attributed to economic value creation like increased earnings and cost cutting. Due to basic supply and demand principles we can expect the stock price to increase and the demand will remain constant despite a decrease in supply. Making the supply low and demand constant, we can predict an increase in the price of stock (CFI, 2022).A good example of share repurchasing is a company that earns $10 million a year with 100,000 outstanding shares. The outstanding shares have EPSàof $100. If the company decides to repurchase 10,000 of those share that leaves 90,000 outstanding shares and the EPS will increase to $111.11 without any actual increase in earnings. This type of investment may look attractive to short-term investors because some companies3et-up scheduled buybacks. In turn, the rapid interest in the company, artificially inflates the stock valuation and P/E (price to earnings) ratio.Although this practice could prove to be beneficial for companies and short-term investors, there is a risk the stock price could fall after the shares are repurchased. Additionally, a companyàcredit rating can be negatively affected if the company chooses to borrow money in the event of a stock buyback. This is done because credit reporting agencies don see EPS or undervaluing as reasons to take on debt. Many companies still choose to finance buybacks because the loan interest is tax-deductible, however there will be a one percent excise tax on buybacks over $1 million beginning January 2023 (Segal, 2022).ReferenceBanton, C. (2022, September 8). Share repurchases: why do companies do share buybacks? Investopedia.Share Repurchases: Why Do Companies Do Share Buybacks? (investopedia.com)Links to an external site.CFI Team (2022, October 12). Share repurchase. Corporate Finance Institute.Share Repurchase – Overview, Impact, and Signaling Effect (corporatefinanceinstitute.com)Links to an external site.Segal, T. (2022, August 31). Stock buybacks: why do companies buy back shares? Investopedia.Stock Buybacks: Why Do Companies Buy Back Shares? (investopedia.com)Links to an external site.
• Collapse SubdiscussionLisa Williams
• Lisa Williams

WednesdayMar 22 at 2:28pm

Manage Discussion Entry

Unit 2: Exchange Forum Comment- The Costs of Bankruptcy and Financial Distress

Default increases a company’s exposure to bankruptcy. Default refers to the borrower falling behind on payments. On the other hand, bankruptcy is the legal process where creditors and legal authorities work collaboratively to oversee the finances of an insolvent company, intending to stabilize the company for it to be able to meet its obligations. Bankruptcy precipitates issues of financial distress and associated costs (Berk & DeMarzo, 2012). Bankruptcy itself is a costly process and a culmination of costly financial distress (Senbet & Wang, 2012). For instance, filing for bankruptcy involves some fees, and there are also legal and accounting fees involved. In addition, the company loses valuable human capital and incurs other costs when disposing of its assets. These are some of the costs of bankruptcy.

The costs associated with financial distress are also vast and significant. First, a company in financial distress faces diminishing or lost profitability as the focus shifts to correcting the deteriorating financial situation (Watson & Head, 2010). The company can hardly generate revenue or income because it cannot meet its obligations. This inability leads the other costs. For example, the company finds it difficult to secure credit, especially from suppliers (Berk & DeMarzo, 2012). Because suppliers fear that the distressed company may default on their dues, they tend to demand a higher percentage of their supplies payment to be done upfront, thus aggravating financial strain on the struggling company. Lenders are also cautious of companies exposed to the risk of insolvency (Watson & Head, 2010). Therefore, if they are to extend credit to such companies, they charge higher interest rates as compensation for taking high risks. The costs of a finically distressed company do not end at this point. They extend to loss of talent as the company becomes increasingly unable to meet its compensation obligations. Therefore, financial distress plays a critical role in occasioning bankruptcy.

References

Berk, J., & DeMarzo, P. (2012). Corporate finance. Person Education Limited.

Senbet, L. W., & Wang, T. Y. (2012). Corporate financial distress and bankruptcy: A survey. Foundations and Trends)n Finance, 5(4), 243-335. Retrieve March 20, 2022 from http://dx.doi.org/10.1561/0500000009Links to an external site.

Watson, D., & Head, A. (2010). Corporate finance: Principles and practice. Pearson Education.