Question

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:

Answer 1

It should be recommended that the customer should sell long.

Step-by-step explanation:

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.