ACCA Advanced Financial Management (AFM) Practice Exam

In an open market purchase plan, what happens to the reinvested dollars?

1. They are held in cash

2. They are turned over to a trustee for share purchases

3. They are returned to the shareholders

4. They are used for company expenses

The correct answer is: They are turned over to a trustee for share purchases

In an open market purchase plan, the reinvested dollars are turned over to a trustee for share purchases. This structure is designed to facilitate the company’s acquisition of its own shares from the open market, rather than distributing those funds in other ways. When a company implements such a plan, it typically hires a trustee or a financial institution to manage the funds on behalf of the company. The trustee uses these funds specifically to buy back shares of the company, which can help to reduce the number of outstanding shares, provide support for the share price, and enhance earnings per share. This process allows for a structured and professionally managed approach to share repurchases, ensuring that the transactions occur at appropriate market prices. By contrast, holding the funds in cash would not utilize them effectively for the stated purpose of an open market purchase plan. Returning them to shareholders or using them for company expenses diverges from the goal of enhancing shareholder value through share buybacks, which is central to the intent of an open market purchase plan.