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:

Taft and Polk Corp.s management is worried that a private equity firm is interested in purchasing the company. The management has decided the company should repurchase its shares on the open market in an attempt to increase the value of the firms stock.

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.

Stock repurchases are an effective way to change the firms capital structure when the amount of equity in the current capital structure is significantly greater than the firms target capital structure.

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

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