(Learning Objective 3: Purchasing treasury share to fi ght 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, ECP Investments, is attempting to buy 52% of TPE’s outstanding share against the wishes of TPE’s board of directors. TPE board members are convinced that ECP 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 fi ght off the hostile takeover bid. The suggestion with the most promise is to purchase a huge quantity of treasury shares. ECP has the cash to carry out this plan.

❙ Requirements 1. Suppose you are a signifi cant shareholder of ECP. Write a memorandum to explain to the board how the purchase of treasury shares would make it diffi cult for the ECP 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 fi ghting 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?