Learning Objective 3: Explain purchase of treasury stock to fight off a takeoverof the corporation) Krugman Exports, Inc., is located in Clancy, New Mexico. The companydoes business with specialty stores such as Neiman Marcus. Krugman’s recent success hasmade the company a prime target for a takeover. The investment group Creston is attempting tobuy 52% of Krugman’s outstanding stock against the wishes of Krugman’s board of directors.Board members are convinced that Creston would sell the most desirable pieces of the businessand leave little of value. At the most recent board meeting, several suggestions for fighting offthe hostile takeover were made. The one with the most promise is to purchase a huge quantityof treasury stock. Krugman has the cash to carry out this plan.Requirements1. Suppose you are a significant stockholder of Krugman Exports, Inc. Write a memorandumto explain to the board how the purchase of treasury stock would make it difficult for Creston to take over Krugman. Explain the effect that purchasing treasury stock would have onstock outstanding and on the size of the corporation.2. Suppose Krugman is successful in fighting off the takeover bid and later sells the treasurystock at prices greater than the purchase price. Explain what effect these sales will have onassets, stockholders’ equity, and net income.
Learning Objective 3: Explain purchase of
of the corporation) Krugman Exports, Inc., is located in Clancy, New Mexico. The company
does business with specialty stores such as Neiman Marcus. Krugman’s recent success has
made the company a prime target for a takeover. The investment group Creston is attempting to
buy 52% of Krugman’s outstanding stock against the wishes of Krugman’s board of directors.
Board members are convinced that Creston would sell the most desirable pieces of the business
and leave little of value. At the most recent board meeting, several suggestions for fighting off
the hostile takeover were made. The one with the most promise is to purchase a huge quantity
of treasury stock. Krugman has the cash to carry out this plan.
Requirements
1. Suppose you are a significant stockholder of Krugman Exports, Inc. Write a memorandum
to explain to the board how the purchase of treasury stock would make it difficult for Creston to take over Krugman. Explain the effect that purchasing treasury stock would have on
stock outstanding and on the size of the corporation.
2. Suppose Krugman 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,
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