question archive Lucinda Lowery Exports, Inc
Lucinda Lowery Exports, Inc
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Lucinda Lowery Exports, Inc., is located in Clancy, New Mexico. Lowery is the only company with reliable sources for its imported gifts. The company does a brisk business with specialty stores such as Neiman Marcus. Lowery’s recent success has made the company a prime target for a takeover. An investment group named Alberton is attempting to buy 52% of Lowery’s outstanding stock against the wishes of Lowery’s board of directors. Board members are convinced that the Alberton 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 fight off the hostile takeover bid. The suggestion with the most promise is to purchase a huge quantity of treasury stock. Lowery has the cash to carry out this plan.
Requirements
1. Suppose you are a significant stockholder of Lucinda Lowery Exports, Inc. Write a memorandum to explain to the board how the purchase of treasury stock would make it difficult for the Alberton group to take over Lowery. Include in your memo a discussion of the effect that purchasing treasury stock would have on stock outstanding and on the size of the corporation.
2. Suppose Lowery management is successful in fighting off the takeover bid and later sells the treasury stock at prices greater than the purchase price. Explain what effect these sales will have on assets, stockholders’ equity, and net income.
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Req. 1
MEMORANDUM
TO: Lucinda Lowery Exports, Inc., Board of Directors
FROM: Student Name
RE: How the purchase of treasury stock will make it more difficult for outsiders to take over the company
Purchasing treasury stock decreases the amount of stock outstanding. If Lucinda Lowery Exports holds a sufficient quantity of company stock in the treasury, outsiders, such as the Albert on investor group, may not be able to acquire a controlling interest (50+ percent) of the outstanding stock from the remaining stockholders. Because it takes cash to buy treasury stock, the purchase decreases the size of the corporation. Reducing the company's cash position may make the company sufficiently unattractive to cause the outside investors to abandon their takeover plan.
Req. 2
Sales of treasury stock at prices above the purchase price increase company assets because of the greater amount of assets coming in from the sale than went out to buy the stock. Treasury stock transactions do not affect liabilities, so the sale of treasury stock also increases stockholders' equity. These sales of treasury stock will not affect net income because the company is dealing with its owners. Transactions between the corporation and its owners cannot generate a profit or a loss that is reported on the income statement.
