6. The liquidity of Easton
The declining liquidity and current low
stock has declined
volume are further evidence that the
family’s 45 percent holding is large,
Decrease
substantially over the past
three years. The current
thus tending to increase the
marketability discount.
Have no effect on
average daily trading
volume of 100,000 shares
is relatively low in relation
Increase
to the number of shares
outstanding.
Part B
A hedge fund manager could:
i. use Easton securities to construct a distressed debt arbitrage by acquiring Easton debt at a
distressed price and simultaneously selling Easton’s stock short.
ii. earn a return under either scenario. (1) If Easton’s financial condition continues to
deteriorate and the price of the stock falls faster than the debt, the profit on the short
position will outweigh the loss on the long position. (2) Alternatively, if Easton’s
financial condition improves and the debt increases in value faster than the stock, then the
profit on the long position will outweigh the loss on the short position. If interest
payments are reinstated, additional gains would accrue to the long position.
LEVEL III, QUESTION 12
Topic: Equity Analysis-Global Considerations
Minutes: 16
Reading References:
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