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 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 acquire shares needed for employee options or compensation

To distribute excess funds to stockholders

To protect against a takeover attempt

To adjust the firms capital structure

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

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

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

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.