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Monday, February 28, 2005

A good question on treasury stock and distributions

I came across this at Catallarchy a while back (but I didn't have a blog at the time, so I'll reference it now). There are a couple of good questions for a corporate finance class:

On the table in front of me sits an unsealed, transparent envelope. The envelope is labelled as follows :

This Envelope and Its Contents are the Entire Assets of the Public Stock Company Known as The Transparent Envelope Company, or TEC.

In my possession I have a stock certificate for 1 (one) share of TEC.

In the envelope, there are two $5 Federal Reserve Notes and a stock certificate for 1 (one) share of TEC, identical to my own.

No other TEC stock certificates exist in any form, anywhere.

Across the table from me sits my brother, who has neither stock nor money.

Question #1 – What total price and price per share would a third party buyer be willing and required to pay for the entire company, assuming that he were willing to accept no gain or loss?

Question #2 – There are four possible distinct distributions of a single item in the envelope to either my brother or myself, i.e. a $5 Federal Reserve Note or a stock certificate for 1 (one) share of TEC. For each of the four possible distinct combinations of item and recipient, determine the change in the total price for the entire company that would result and label each particular combination with what it could be called if it were a real transaction of a real public stock company.

a. $5 FRN to me –
b. $5 FRN to my brother –
c. Stock certificate to me –
d. Stock certificate to my brother –

There are some good responses in the comments to the original post.

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