Because of the Hurricane Katrina, the stock market has spiralled downward and the share price of the Gainesboro has decreased 18%. If Gainesboro buy their stocks back currently, some investors will think that Gainesboro’s managers considered their stocks are undervalued and decide to buy it back and will react favourably to share buyback announcement. (Many investors hold the opinion that the managers know the firm better than others and act for the benefit of the current stockholders). Under this condition, they will buy more stocks and push the share price up. However, a spate of companies also conduct the repurchase policy, which will cause some of investors thought the Gainesboro is following the market. It will have quiet few impact on stockholders and the share price On the other hand, some people will regard it as the company does not have better future investment. Normally, a high-tech firm tend to retain cash, if they repurchase their stocks it possibly means they do not have better investment. Under this situation, the shareholders will sell their stocks.
For the creditor of the company, the repurchase activity will convince them that the company have sufficient cash and believe that the company could repay their debts. If this happened, the bonds price of the company will increase. Everything is a double-edged sword. When a firm faces financial distress, shareholders have an incentive to withdraw money from the firm, if possible. Because the firm has faced a large loss in past three years, this action will lead the creditors to think that the firm is in a financial dilemma. As managers and supervisors of the corporation act on behalf of the shareholders and know better about the firm, they will utilize every method to withdraw money from the company. It will arise the panic of the company’s shareholder and reduce the bonds’ price.
In my opinion, I do not recommend the Gainesboro to repurchase some stock back. According to the material, it is obvious that the company have a good market expectation. Though target business has suffered restructuring in 2002 and 2004 and caused a $202 million loss, the company have launched a turnaround in 2005. The restructuring of the company get a pretty successful result, the sales of the company has become to recovery. On the basis of Gainesboro’s plan, their EPS will be improved dramatically, from -$7.55 to $0.98. From the goals of the company, we can find that the company’s expected growth rate would be the 15% from 2005 to 2011. Huge improving of the expecting EPS and growth rate indicate the share price of the company will increase dramatically in next year. Because of the Hurricane Katrina which is a business environment factor, the share