Share buybacks
The following note comes from the 2007 annual report for The Walt Disney Company:
As of the filing date of this report, the Board of Directors had not yet declared a dividend related to fiscal 2007. The Company paid a $637 million dividend ($0.31 per share) during the second quarter of fiscal 2007 related to fiscal 2006.
During fiscal 2007, the Company repurchased 202 million shares of Disney common stock for $6.9 billion. During fiscal 2006, the Company repurchased 243 million shares of Disney common stock for $6.9 billion. On May 1, 2007, the Board of Directors of the Company increased the share repurchase authorization to a total of 400 million shares. As of September 29, 2007, the Company had remaining authorization in place to repurchase approximately 323 million additional shares. The repurchase program does not have an expiration date.
The par value of the Company’s outstanding common stock totaled approximately $26 million.
Required
(a) What reasons can you give for why Disney bought back so many of its shares (a total of nearly $14 billion in 2006 and 2007 combined)?
(b) Disney’s normal policy regarding buybacks is to retain the shares in treasury (instead of cancelling them). Why is treasury stock a contra-equity account and not an asset?
(c) Based on the above note, what do you think must have happened to Disney’s share price from 2006 to 2007? Did it go up, go down, or stay the same?
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