16 Dell Computer Corporation – Share Repurchase Program.pdfVIP

Harvard Business School 5-201-115 April 13, 2001 t s o Dell Computer Corporation - Share Repurchase Program P Teaching Note r o Objectives This case studies the practice followed by many firms, particularly large capitalization, high- y tech firms such as Microsoft, Intel, and Sun Microsystems, of buying call options on their own stock and selling put options. The case illustrates the main reason offered by these firms for this practice: namely hedging the risks associated with their executive stock option programs. Thus, the case easily motivates a discussion of options, executive stock options, share repurchases, information asymmetry, p and agency costs. A rich discussion can also be had about theories of risk management and whether those theories are applicable in the context of this case. o The case can be used at the start of a course on derivative securities and financial engineering, in an introduction to derivative securities module within a corporate finance course, or in a course on risk management. The discussion will usually evolve to cover a number of important financial issues st beyond simple option payoff diagrams and put-call parity. The case is currently used in both the 1 - C Year Finance course and the Corporate Financial Engineering course at HBS. t o Case Summary Dell Computer Corp. had seen its stock price drop from $50 per share on November 1995 to around $25 by January 1996. In response to this stock price drop, Dell announced a share repurchase program on February 1996. Dell’s board had authorized the repurchase of up to 12 million shares N through open market transactions. Professor George Chacko, with the assistance of Research Associate Eli Strick, prepared this note for the sole purpose of aiding classroom instructors in the use of the case, Dell Computer Corporation - Share Repurchase Program, HBS Case No. 200- 056. o Copyright ? 2001 by the President and Fellows of Har