Fundybay Corporation is positioned ideally in its industry. Located in Nova Scotia, Fundybay Corporation is the only company with a reliable record for its locally managed transport company. The company does a brisk business with local major corporations. Fundybay Corporation's recent success has made the company a prime target for a takeover. An investment group from Halifax is attempting to buy 51 percent of the company's outstanding shares against the wishes of Fundybay Corporation's board of directors. Board members are convinced that the Halifax investors would sell off the most desirable pieces of the business and leave little of value.
At the most recent board meeting, several suggestions were advanced to fight off the hostile takeover bid. The suggestion with the most promise is to repurchase and cancel a huge quantity of shares. Fundybay Corporation has the cash to carry out this plan.
Required
1. As a significant shareholder of Fundybay Corporation, write a memorandum to explain to the board how the repurchase and cancellation of shares might make it more difficult for the Halifax group to take over Fundybay Corporation. Include in your memo a discussion of the effect that repurchasing shares would have on shares outstanding and on the size of the corporation.
2. Suppose Fundybay Corporation management is successful in fighting off the takeover bid and later issues shares at prices greater than the purchase price. Explain what effect the sale of these shares will have on assets, shareholders' equity, and net income.