CFA Level II ExamCorporate IssuersMedium
A company is considering repurchasing shares. The CFO believes the company's stock is undervalued and wants to signal this to the market. Which of the following share repurchase methods would most effectively convey this positive signal to investors?
- AAn accelerated share repurchase (ASR) program.
- BA tender offer at a premium to the current market price.
- CNegotiated repurchase from a large institutional investor.
- DOpen market repurchase program over several months.
Show answer & explanationAnswer & explanation
Correct answer: B. A tender offer at a premium to the current market price.
A tender offer at a premium to the current market price sends the strongest signal that management believes the stock is undervalued. By offering to pay more than the prevailing market price, the company explicitly communicates its view that the shares are worth more.
Why the other options are wrong
- A. ASRs are efficient but don't carry the same strong undervaluation signal as a premium tender offer, as the price is typically based on market averages.
- C. A negotiated repurchase can be done for various reasons (e.g., to remove a blockholder) and doesn't always signal undervaluation strongly.
- D. Open market repurchases are common and provide a weaker signal as they are less aggressive and more routine.
Share Repurchase Signaling
The act of a company buying back its own shares, often interpreted by investors as a positive signal that management believes the stock is undervalued.
- Can convey management's confidence in future prospects.
- Tender offers at a premium send the strongest signal.
- Open market repurchases are less impactful as signals.
Memory trick: Premium tender shouts 'undervalued' loudest.