For What Reason Would a Company Buy 10% of the Common

question 26

Multiple Choice

For what reason would a company buy 10% of the common stock of a second company?

• A) The company has idle cash and wishes to have a higher return than that available from temporary money market investments.
• B) The company wishes to insure a steady source of goods from the second company.
• C) The company wishes to prepare consolidated financial statements.
• D) More than one of the above is correct.

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Definitions:

Abnormal Earnings Approach

A method for valuing a company's worth based on the premise that stock prices are influenced by differences between the expected and actual earnings, adjusted for the cost of capital.

Equity Valuation

The process of determining the fair market value of a company's equity or shares.

Positive Abnormal Earnings

Earnings that exceed what is normally expected, based on historical trends or industry standards, often indicating superior performance.

Sustainable Earnings

Refers to the portion of a company's income considered to be predictable, repeatable, or likely to continue in the future.