Guatemalan Imports is the only company with reliable sources for its imported gifts. The company does a brisk business with specialty stores such as Pier 1 Imports. Guatemalan Imports' recent success has made the company a prime target for a takeover. An investment group from Mexico City is attempting to buy \(51 \%\) of Guatemalan Imports' outstanding stock against the wishes of the company's board of directors. Board members are convinced that the Mexico City investors would sell the most desirable pieces of the business and leave little of value.

At the most recent board meeting, several suggestions were advanced to fight off the hostile takeover bid. The suggestion with the most promise is to purchase a huge quantity of treasury stock. Guatemalan Imports has the cash to carry out this plan.

Requirements 

1. As a significant stockholder of Guatemalan Imports, write a memorandum to explain to the board how the purchase of treasury stock would make it difficult for the Mexico City group to take over the company. Include a discussion of the effect that purchasing treasury stock would have on stock outstanding and on the size of the corporation. 

2. Suppose Guatemalan Imports is successful in fighting off the takeover bid and later sells the treasury stock at prices greater than the purchase price. Explain what effect these sales will have on assets, stockholders' equity, and net income.