THE LIQUIDITY OF EASTON THE DECLINING LIQUIDITY AND CURRENT LOW STO...

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: