ACCA Advanced Financial Management (AFM) Practice Exam

What is a Dutch auction in the context of stock repurchases?

1. A method of public offering

2. A process to buy back shares at the lowest possible price

3. A type of investor meeting

4. A cash dividend strategy

The correct answer is: A process to buy back shares at the lowest possible price

In the context of stock repurchases, a Dutch auction is a method that allows a company to buy back its shares at the lowest possible price. During a Dutch auction, the company specifies a range of prices at which it is willing to repurchase shares. Shareholders then submit bids indicating the quantity of shares they are willing to sell at various prices within that range. The final purchase price is determined based on the lowest bid price at which the company can acquire the desired number of shares. This process is beneficial for the company as it allows for potentially lower acquisition costs since it pays the lowest price at which it can secure the necessary number of shares, thus resulting in efficient capital deployment. Moreover, it also provides flexibility and allows shareholders to express their valuation of the shares effectively. By encouraging competitive bidding, a Dutch auction can help identify the market's fair value for the shares being repurchased. In contrast, a method of public offering involves issuing new shares to raise capital, which does not relate to share buybacks. An investor meeting typically pertains to communications and discussions with shareholders but does not denote a mechanism for repurchasing shares. A cash dividend strategy is focused on distributing profits back to shareholders rather than reacquiring shares from the market.