When a Company Wishes to Purchase and Retire Its Own

question 72

Multiple Choice

When a company wishes to purchase and retire its own stock, the company must

• A) decrease the stock account balances by the original issue price.
• B) record a gain or loss depending on the difference between original selling price and repurchase cost.
• C) get the approval of the state to do so.
• D) issue a different class of stock to the former stockholders.

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Definitions:

Bankruptcy Risk

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations and may be forced into bankruptcy.

Agency Costs

Expenses arising from the conflict of interest between a company's management or its shareholders and its creditors.

Financial Risk

The risk added by the use of debt financing. Debt financing increases the variability of earnings before taxes (but after interest); thus, along with business risk, it contributes to the uncertainty of net income and earnings per share. Business risk plus financial risk equals total corporate risk.

Market Risk

The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.