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:

Smith and Martin Co.s board of directors has decided to repurchase some of its stock on the open market because it wants to increase the companys debt-to-equity ratio.

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.

The market generally perceives a stock repurchase as a sign that management believes that the firms stock is undervalued.

At times, the company will repurchase its stock at a price higher than the true value of the stock.

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.