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Belden Engineering Corporation (BEC) is considering a share repurchase program. David Gudzanski, the firm’s executive vice president prepares a memo to the board of directors detailing reasons why a share repurchase would be favorable at this time. Reasons listed in the memo are as follows:
Reason 1: The resulting capital structure from the share repurchase would be more favorable for investors in BEC’s bonds.
Reason 2: BEC’s stock is currently selling at $37 in the marketplace. Our discounted cash flow analysis values the company at $48 per share.
Reason 3: The share repurchase could be used to offset dilution caused by the exercise of employee stock options.
Reason 4: BEC can use the repurchase to send a signal to investors that management has a positive future outlook for the company.
Reason 5: The share repurchase could be used to implement a residual dividend policy while diminishing the potential increase in perceived risk that such a policy would cause for investors.
Which of Gudzanki’s reasons in favor of the share repurchase is most accurate? A. Reasons 2 and 3 only. B. Reasons 1 and 3 only. C. Reasons 2, 3, 4, and 5. |