During the 2008-2009 financial crisis, stock prices fluctuated wildly. The S&P 500 Index was 1,549.38 in October 2007, then dropped all the way to 735.09 in February 2009, and then rebounded to 1,104.49 by February 2012. Companies that actively repurchased their own stock shares were buyers in this volatile market. Movie rental company Netflix, for example, repurchased $130 million of its own stock in the third quarter of 2009 and publicly stated that it would borrow additional money to continue the continue the buy-backs. Amazon.com board of directors authorized a $2 billion stock buy-back, despite the fact that its shares were trading at 45 times the company’s projected 2010 earnings. Sears spent $134 million by August 1, 2009, to repurchase 2.7 million shares. Apple, Inc., on the other hand, did not repurchase any of its shares during this time period.
(a) What is meant by a stock price selling for “45 times” its earnings?
(b) What does a volatile stock market do to a company with an announced plan to repurchase its own shares?
(c) Explain how repurchases followed by stock issuances affect the financial statements.
(d) Netflix borrowed to finance share repurchases. How would this sequences of events affect its leverage position?
(e) If companies reissue previously purchased treasury stock at prices that differ from the cost of the repurchases, are gains and losses recognized on the income statement? Why or why not?