Reading 47: Dividends and Share Repurchases: Basics-LOS c 习 2011, contrast, methods, border

1215

Session 11: Corporate Finance
Reading 47: Dividends and Share Repurchases: Basics

LOS c: Compare and contrast share repurchase methods.

 

 

Which justification for repurchasing stock is the least valid?

A) Repurchases offer shareholders more choices than cash dividends.

B) A cash dividend increase, in response to short-term excess cash flows, may confuse investors.

C) Shareholders prefer capital gains to cash dividends.

---

 

Some shareholders prefer capital gains, while others prefer dividends. Repurchases offer shareholders the choice of tendering or not tendering their stock, while cash dividends represent a payment they cannot refuse. Raising dividends is often seen as a positive signal, but an increase funded by short-term cash flows may not be sustainable, forcing the company to reduce the dividend later.

1215

Which of the following statements about a stock repurchase is least accurate?

A) A stock repurchase occurs when a large block of stock is removed from the marketplace.

B) Disgruntled stockholders are forced to sell their shares, improving management's position.

C) Management can distribute cash to shareholders without signaling about future earnings.

---

A repurchase gives stockholders a choice. They can sell or not sell.

1215

Jim Davis and Thurgood Owen, two equity analysts at Ferguson Capital Management, were reviewing the financial statements of Peregrine Foodstuffs Ltd. Davis and Owen noticed that Peregrine has been repurchasing its common shares in the market over the past three years. Owen thought this was an important issue to look into in greater detail. Upon completion of his review, Owen made the following two statements:

Statement 1: Peregrine has bought back shares in the open market during its repurchase program. This method of repurchase gave the company the flexibility to choose the timing of the transaction.

Statement 2: Peregrine plans to buy back shares by making tender offers during the coming year. By making tender offers, the company will be able to repurchase shares at a discount to the prevailing market price.

With respect to Owen's statements:

A) only one is correct.

B) both are correct.

C) both are incorrect.

---

Buying in the open market gives the company the flexibility to choose the timing of the transaction. Thus, Statement 1 is correct. A second way is to buy a fixed number of shares at a fixed price. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is at a premium to the current market price. They would not be willing to tender their shares for less than the prevailing market price, so Statement 2 is incorrect.

1215

Which of the following is least likely a method by which firms repurchase their shares?

A) Tender offer.

B) Direct negotiation.

C) Exercise a call provision.

---

Call provisions are not relevant to common stock and are not considered a repurchase in any case. There are three repurchase methods. The first is to buy in the open market. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is usually at a premium to the current market price. The third way is to repurchase by direct negotiation. Companies may negotiate directly with a large shareholder to buy back a block of shares, usually at a premium to the market price.

1215

Laura’s Chocolates, Inc. (LC), is a maker of nut-based toffees. LC is considering a share repurchase and prefers the “tender offer” method. Which of the following is also known as a “tender offer”?

A) Buying a fixed number of shares at a fixed price.

B) Buying in the open market.

C) Repurchasing by direct negotiation.

---

A tender offer refers to buying a fixed number of shares at a fixed price (usually at a premium to the current market price).