Firm A is one of the largest airlines in the world and is based in Europe....

Firm A is one of the largest airlines in the world and is based in Europe. Firm A sold all its struggling operations that operate in the United States to Airline B for a price much less than industry experts had expected.Despite this lower than expected sales price, Firm A’s stock price sharply increased. The primary explanation for the rise in the stock price was hinted at in the announcement. Firm A indicated they would not rush on spending dollars from the sale on non-value adding projects but were considering share repurchases.

What is your interpretation of this scenario? (explain clearly your interpretation of this scenario and explain what will be the firm A position/impact for that transaction)

Expert Solution

Here in this scenario, assuming market efficiency is high the price of the stock of Firm A would have fallen significantly because of the deteriorating performance in the past. Now after the company sold its asset to the B below its fair value. The stock price of firm A would have already been adjusted for this but after the announcement that the company instead of spending in new projects it will buy back its share. The share rice rose because of two reasons, company is not paying dividend but buy back is way to give back to shareholders. Another reason when company Buy back their shares, they believe that market share price is far below its potential so the price would rise for the correction. A general logic about IPO and buyback is, companies go for IPO when the economy is booming, share prices are expected to be high whereas they go for buyback when the share price has fallen far below their potential value.

jeff jeffy answered 2 years ago

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