The master manufacturing company has just announced a tender offer for its own common stock. master is offering to buy up to 100% of the company's stock at $20 per share contingent on at least 64% of the outstanding shares being tendered. after the announcement of the offer, the stock closed on the nyse up 2.50 at $18.75. a customer has 100 shares of master stock in his cash account. the customer tells you that he wishes to "cash out" his position. you should recommend that the customer:
As it is mentioned in the question that 64% of shares being tendered so at this condition the client has no confirmation with respect to the amount paid for the shares after deciding the tender
Therefore in the given case, the price received per share would be $0 and the other information i.e mentioned in the question is not relevant. Hence, ignored it
Since the offer to repurchase the stock's is contingent (or depends on) the fact that 64% of all outstanding stocks are tendered, there is absolutely no assurance that the threshold (64%) will be met. So there is no assurance that the stockholder is going to be paid (there is no guaranteed payment at all) if he/she decides to tender the stocks.
Per share = $20
Contingent on at least 64% of the outstanding shares
Based on the given information provided in the question the customer assurance of receiving would be zero as the company stock based on the contingent that give no assurance of receiving.
Therefore, the amount would be considered as zero
The customer will receive the stock at this price because master manufacturing company's stock is contingent at 64% and we are told that this is a tender offer so when master buys back the shares they wont buy at the same price in which they sold for which is $20.00 that way they wouldn't make more profit from the shares where contingency is assurance that master manufacturing can transfer 64% of the shares back.
It should be recommended that the customer should sell long.
As the offer in the question is contigent on 64% of the tendered shares, this makes the tender be inappropriate if the customer wants to cash out the position.
The right step to take is by selling the long position that has a new higher market price.
Therefore, it should be recommended that the customer should sell long.
Note that to sell long implies that stocks or any other financial investment instrument are purchased now for the purpose of selling them at a higher future price in order to make a profit.