7. Stock repurchases

There are a number of reasons why a firm might want to repurchase its own stock. Read the statement and then answer the corresponding question about the companys motivation for the stock repurchase:

Washington and Jefferson Inc.s board of directors has decided to repurchase some of its stock on the open market because the company has received a large, one-time cash flow, and it believes that the companys stock is undervalued.

What is the companys motivation for the stock repurchase?

To adjust the firms capital structure

To distribute excess funds to stockholders

To protect against a takeover attempt

To acquire shares needed for employee options or compensation

Which of the following statements would be considered advantages of a stock repurchase? Check all that apply.

A stock repurchase can be used to minimize the dilution effect associated with employees exercising their stock options.

Stock repurchases are an effective way to alter the firms capital structure. Stock repurchases are especially effective when the amount of equity in the current capital structure is significantly greater than that required by the firms target capital structure.

The interval between stock repurchases tends to be irregular, which means that investors cannot always count on cash inflows from repurchases.