ACCA Advanced Financial Management (AFM) Practice Exam

What type of plan do firms with no need for new equity capital often prefer?

1. Open market purchase plans

2. Equity exchange plans

3. Asset transfer plans

4. Stock option plans

The correct answer is: Open market purchase plans

Firms that do not require new equity capital often prefer open market purchase plans as these plans allow companies to buy back their own shares from the open market. This strategy can be advantageous for several reasons. By repurchasing shares, a company can enhance its earnings per share (EPS) since the share count decreases, which can subsequently boost shareholder value. Additionally, returning excess cash to shareholders through buybacks can signal to the market that the company believes its stock is undervalued, potentially leading to an increase in its share price. Open market purchase plans are also preferable because they provide flexibility; companies can choose to buy back shares as they see fit based on market conditions and their financial situation. They do not require the complexities and commitments associated with issuing new equity or engaging in more involved share exchange agreements. The other options, while relevant in various contexts, do not align as directly with firms that have no need for new equity capital. For example, equity exchange plans typically involve issuing new shares, which contradicts the need to avoid raising new equity. Asset transfer plans could entail significant changes in company assets and operations that are not necessary if a firm has sufficient capital. Stock option plans are commonly used as a means of employee incentive rather than a strategy for firms