Title: Allergan To Sell Businesses in Bid To Appease Shareholders Link: https://

Question

Title: Allergan To Sell Businesses in Bid To Appease Shareholders

Link: https://www.wsj.com/articles/allergan-to-sell-businesses-in-bid-to-appease-shareholders-1527697604

Summary: Biopharmaceutical company Allergan has initiated the sale of two of its medical divisions: women’s-health and infectious-disease. Combined, the annual sales generated from these two divisions totals over $1.25 billion, roughly 8% of the company’s total sales. However, stock performance has been terrible; Allergan shares have declined by more than half of their value since mid-2015. Allergan’s Chief Executive claims that the sale of these two smaller divisions will allow the company to focus on their core business ventures and to reassure investors. Allergan claims the proceeds from the sale of the two divisions will be used to buy back shares and reduce outstanding debt.

I need help answering these 3 questions:

Questions:

1) In the given scenario, will Allergan’s common stock equity increase or decrease? Explain.

2) Is the repurchase of stock by Allergan considered to be an inflow or an outflow of cash? Is the repayment of debt by Allergan considered to be an inflow or an outflow of cash?

3) Which financial statement(s) does this appear on?

Explanation / Answer

1) Value of Common stock equity of the Allergan will increase as due to sale of this 2 small divisions company will be able to focus on its main business and further company will use the proceeds from sale of these 2 divisions for settlement of debt.

2) Both repurchase of stock and repayment of debt by Allergan are to be considered as outflow of cash.

3) It will appear in Balance Sheet, Cash Flow Statement and Statement of Change in Equity.

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