S10-11. (Learning Objective 3: Purchasing treasury share to fight off a takeover of the corporation) Thi Pham Exports, Inc., is located in Hanoi, Vietnam. TPE is the only company with reliable sources for its specialty gifts that are sold in many department stores around the world. TPE’s recent success has made the company a prime target for a takeover. An investment group, PIE Investments, is attempting to buy 51% of TPE’s outstanding share against the wishes of TPE’s board of directors. TPE board members are convinced that PIE Investments’

investors would sell 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 purchase a huge quantity of treasury shares. PIE has the cash to carry out this plan.

Requirements 1. Suppose you are a significant shareholder of PIE. Write a memorandum to explain to the board how the purchase of treasury shares would make it difficult for the PIE group to take over TPE. Include in your memo a discussion of the effect that purchasing treasury shares would have on shares outstanding and on the size of the corporation.

2. Suppose TPE’s management is successful in fighting off the takeover bid and later sells the treasury shares at prices greater than the purchase price. Explain what effect these sales will have on assets, shareholders’ equity, and net income. What happens if the prices remained lower than what TPE paid? Will it report a loss?