Suppose a firm finds itself as the target of a possible hostile takeover. An out

Question

Suppose a firm finds itself as the target of a possible hostile takeover. An outside investor has aquired a major stake of shares and is threatening to exert influence on the broad.

1. If the firm wants to influence the hostile bodder to leave it alone, which of the following methods could be an effective way of doing so?

a. open market transaction

b. direct negotiation

c. auction

d. tender offer

2. If you were to look at a firm's distribution of cash to investors over time, which method of cash distribution is liekly to be used if the firm goes through volatile business cycles?

a. stock repurchases?

b. Dividends

3. In a taxless world with no brokerage costs, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treament that dividends to ordinary investors. Does this mean that firms should always use share repurchases so that investors can gain from this tax benefit?

Yes or no?

Explanation / Answer

answer 1 correct answer is D

The target company can submit a tender offer that is share repurchase for its own
shares. This forces the acquirer to raise its bid in order to stay competitive with
the target’s offer and also increases the use of leverage in the target’s capital
structure

Answer 2 If business cycle is volatile firm will use stock repurchase since, when the acquirer is highly confident in
the Cash flow and value that will be created by the merger, it is more
inclined to push for a cash offering if cash flow is volatile it will go for security offering.

Answer 3 No,Unlike
dividends, share repurchases are not a long-term commitment. Since paying
a cash dividend and repurchasing shares are economically equivalent, a
company could declare a small stable dividend and then repurchase shares
with the company’s leftover earnings to effectively implement a residual
dividend policy without the negative impact that fluctuating cash dividends
may have on the share price. When funded by new debt, share repurchases
increase leverage.

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