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Unformatted text preview: of repurchased shares. The Repurchase Process tender offer
A formal offer to purchase a
given number of shares of a
firm’s stock at a specified price. When a company intends to repurchase a block of outstanding shares, it should
make shareholders aware of its intentions. Specifically, it should advise them of
the purpose of the repurchase (acquisition, stock options, retirement) and the disposition (if any) planned for the repurchased shares (traded for shares of another
firm, distribution to executives, or held in the treasury).
Three basic methods of repurchase are commonly used. One is to purchase
shares on the open market. This places upward pressure on the price of shares if
the number of shares being repurchased is reasonably large in comparison with
the total number outstanding. The second method is through tender offers. A
tender offer is a formal offer to purchase a given number of shares of a firm’s
stock at a specified price. The price at which a tender offer is made is set above
the current market price to attract sellers. If the number of shares desired cannot
be repurchased through the tender offer, open-market purchases can be used to
obtain the additional shares. Tender offers are preferred when large numbers of
shares are repurchased, because the company’s intentions are clearly stated and
each stockholder has an opportunity to sell shares at the tendered price. A third
method that is sometimes used involves the purchase, on a negotiated basis, of a
large block of shares from one or more major stockholders. Again, in this case,
the firm has to state its intentions and make certain that the purchase price is
fair and equitable in view of the interests and opportunities of the remaining
shareholders. 578 PART 4 Long-Term Financial Decisions Review Questions
13–7 Why do firms issue stock dividends? Comment on the following statement: “I have a stock that promises to pay a 20 percent stock dividend
every year, and therefore it guarantees that I will break even in 5 years.”
13–8 Compare a stock split with a stock dividend.
13–9 What is the logic behind repurchasing shares of common stock to distribute excess cash to the firm’s owners? S U M M A RY
FOCUS ON VALUE
Cash dividends are the cash flows that a firm distributes to its common stockholders. As
noted in Chapter 7, a share of common stock gives its owner the right to receive all future
dividends. The present value of all those future dividends expected over a firm’s assumed
infinite life determines the firm’s stock value.
Dividends not only represent cash flows to shareholders but also contain useful information with regard to the firm’s current and future performance. Such information affects
the shareholders’ perception of the firm’s risk. A firm can also pay stock dividends, initiate
stock splits, or repurchase stock. Each of these dividend-related actions can affect the firm’s
risk, return, and value as a result of their cash flows and informational content.
Although the theory with regard to the re...
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