Alpha Centaur currently forecasts earnings to be $490,000 for the year ending 30 June 2023. This forecast includes $14,700 in after-tax interest earned on the $4,200,000 in cash on hand as of 31 December 2022. Different from its competitors who provide regular earnings forecast, Alpha Centaur only issues forecasts of key metrics (revenue and operating expenses) if the consensus analyst earnings forecast is more than 10% over or under its internal earnings forecast.

 

Alpha Centaur's CFO, Andrea Leveris, is considering using the cash on hand to buy back shares at the current stock price of $25, as she believes that this would increase earnings per share (EPS) and perhaps get a favourable reaction from the market, even though it would mean forgoing the $14,700 in after-tax interest. Without a share buyback, the number of shares outstanding would remain at the 700,000 that it has been for the last three years.

 

i. Assume there is no share buyback. Calculate forecasted earnings per share to two decimal places. Show calculation.

ii. Assume there is a share buyback on 31 December at $25 per share using all the cash on hand $4,200,000. Calculate forecast earnings per share to two decimal places. Show calculations.

iii. Suppose that Leveris is concerned about the possibility of a sales downturn that is not anticipated by the market, but that would be difficult to withstand if Alpha Centaur does not have cash on hand. How might this affect Leveris's decision on whether to buy back shares?

iv. Suppose the market is semi-strong form efficient. How might you expect the market to react if Alpha Centaur announces that it has bought back shares and that its EPS has increased this year? Explain why.

v. Alpha Centaur has just entered a new market with a strong growth potential. Based on the evidence from the ERC literature, what type of information should be disclosed in the financial reports to increase its usefulness? Also what potential cost might arise from such disclosure? Explain why.

vi. Discuss one benefit and one cost of Alpha Centaur's earnings forecast policy.