So You Think You Understand Stocks?

An NYSE corporation, Acme Alpha Assurance, symbol AAA, has a market capitalization of $1B and a cash holding of $100M in USD. With 100M outstanding shares, each share is worth $10.

On Friday, Warren Buffet is going to pay $1B for the entire company as a favor to its current majority owner, Bill Gates.

On Thursday evening, Acme issues a press release describing a material SEC filing that it has just made. Unfortunately, Omaha has temporarily lost its electricity and Warren only knows of the existence of the SEC filing, but not its detailed content.

There are five possibilities for the content :

1. The company has found that its $100M in cash has disappeared along with its CFO, and that this is an uninsured loss.

2. The company has issued a 10% share dividend to all shareholders, increasing the outstanding share count to 110M, effective immediately.

3. The company has issued a $1 cash dividend for each of its 100M outstanding shares, effective immediately.

4. The company has spent its $100M buying back stock, reducing the outstanding share count to 90M.

5. The company has made an instant secondary offering, selling 10M new shares for $100M, increasing the outstanding share count to 110M.

Not attempting to take advantage or to be disadvantaged by a changed situation, Warren will either leave his bid for the entire company unchanged, increase it by $100M, or decrease it by $100M, depending on the actual content of the SEC filing.

Out of 1,2,3,4, and 5 above,

a. Which ones of the 1-5 will result in an unchanged bid?

b. Which ones of the 1-5 will result in an increased bid?

c. Which ones of the 1-5 will result in a decreased bid?

Answers to follow.

Someday.

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