ACCA Advanced Financial Management (AFM) Practice Exam

What impact do tender offers usually have on stock prices?

1. Stock prices increase by 5%

2. Stock prices increase by 11%

3. Stock prices remain unchanged

4. Stock prices decrease by 11%

The correct answer is: Stock prices increase by 11%

Tender offers typically lead to an increase in stock prices, often reflecting the premium offered by the acquiring company to incentivize shareholders to sell their shares. The correct answer indicates an upward movement of 11% in stock prices, which can be attributed to several factors. When a company makes a tender offer, it usually does so at a price that is higher than the current market price, providing immediate value to shareholders. This premium encourages shareholders to accept the offer, resulting in heightened demand for the stock as investors speculate on the potential success of the acquisition. Additionally, the market tends to respond favorably to tender offers, as they signal the potential for company consolidation and synergy, which can lead to future profitability. The anticipated uptick in stock prices can also be influenced by investor sentiment and expectations regarding the long-term benefits of the merger or acquisition, as market participants often react positively to news of strategic growth initiatives. In contrast, stability in stock prices or a decrease would not align with the general trend observed in the market following such announcements, where the expectation is usually a positive reception due to the financial incentives provided through the tender offer.