Your firm, where you are the new Chief Financial Officer (CFO), has had an interesting year. For the entire year, you have been operating under the pressure of meeting a major EPS growth challenge. Prior to the start of the year, your Chief Operating Officer (CEO) committed to the investment community that your EPS would move from $2.20 in 2013 to $2.42 in 2014. This was based on target earnings after interest and taxes of $365 million. This is up from actual earnings of $330 million in 2013.
The good news is that you are now at mid-year and you have projected that you will either hit the target or beat it by a small amount. Wall Street has been watching closely and really likes what they are seeing. As a result, your stock price has moved from a year-end $22 per share to $30 per share as of June 30th. Nearly all of the increase has occurred over the past two weeks. However, both Wall Street's and your own year-end projection are for the price to retreat before the end of the year to the $23-$24 per share range.
Your CEO is beaming as he goes off on his annual July 4th holiday vacation week on Martha's Vineyard. Based on your financial projections, he sees the second half of 2014 as a "victory lap" on what is sure to be a banner year for the corporation.
You are happy as well but have some nagging concerns. You sit down in your office and go over some of the basics:
There were 150 million shares of common stock outstanding as of January 1, 2014.
The original Employee Stock Purchase Program projection was for a total of 800,000 shares to be purchased in 2010. This is based on a stock price of $22.
Your real concerns are the following:
The sudden stock price appreciation will result in the mass conversion of 10,000 ($1,000 par value) convertible bonds to common stock before the stock price retreats towards the end of the year. The bonds have a 40 to 1 conversion ratio
Your stock transfer agent has just informed you that several of the corporation's executives are in the process of executing a large number of their stock options. The agent puts the number of options being exercised at 1 million.
The only positive is that the Employee Stock Purchase Plan is based on a fixed regular payroll deduction. As a result, a rising price will result in fewer shares purchased. In order to achieve the EPS target of $2.42 per share, describe in detail what step(s) you will have to undertake. Provide all necessary supporting calculations.