Question

1. Novartis International, a Swiss multinational pharmaceutical company based in Basel, Switzerland, has made a huge profit from the sales of new atypical anti-psychotic medication. The CFO wants to return the cash back to investors, and he is considering whether he should pay dividends or make repurchase. The CFO asks for the opinion of an external consultant, who argues, “Making repurchase allows you to reduce the share counts. If the firm’s future revenue does not change, then fewer share counts leads to higher EPS. As a result, we can expect higher stock price.”

Comment on what the consultant has said.

2. Now the CEO wants to hire you as the new consultant. After some research, you find that another pharmaceutical firm is also researching the same medicine and will be able to launch a full scale production next year. Therefore, you suspect that the increased revenue is unsustainable. Bearing that in mind, will you suggest the CFO to make payout via dividends or repurchase? Why?

Answer 1

Ans 1) Consultant is correct about the earning per share because the share repurhase will reduce the number of share outstanding and same amount of earning will be earning more return per share it will also increase the return on equity which is a good sign and will increase the share price of in short term that is one of the goal of CFO thus it is a good idea.

Ans 2) After getting new information I will suggest that the company should countinue with the share repurchase plan because it will affect the new income which ultimately impact the the EPS and ROE of the company but if company will reduce the nuber of share outstanding then the share price will be not much impacted due to less change in EPS and ROE.