The paper "At the T. Rowe Price Trading Desk" is a good example of an assignment on finance and accounting. Greg realized that it was very much difficult to sale the Avantek shares in bulk amount. Avantek used to trade in the OTC market where it had a share price of around $25 from July 26 to august 20 in 1984. But the share price was reduced to $18 in the month of May. Analysts had stated that the company is having some problems in their earnings for a short time period but they liked the shares for a long term basis.
Greg first offered Steve to buy 183000 Avantek shares at $245/8(100 shares). But Steve tried to hook the position with Greg and then He offered Michael who is from Goldman. He tried to make a one-shot deal by offering a swap of 183000 shares of Avantek for 320000 shares of Tandem. But Michael lowered the price 23 ½. The shares of Avantek were difficult to execute because the company was unable to increase the earnings in the fourth quarter due to a slowdown in the TVRO market.
Although that might be a seasonal slowdown analyst had stated that the valuation of the company might go more down. Thus the shares were risky to buy (Perold, 2003). Tandem shares are also traded in the OTC market and Greg decides that this might be the best approach if he offers a swap contract to Michael. It can help T. Rowe because T. Rowe has already taken a substantial amount of long term position in the shares of Tandem and they want more 320000 shares of Tandem.
Thus it is a good deal to offer Avantek shares to Michael and buy Tandem as a package deal. This deal will be helpful for Goldman because Goldman has mentioned that they are aware of a seller of Tandem. Thus if T. Rowe buys the shares then they can get some percent as they are recommending the seller. I would not have accepted the terms offered by Goldman. It is because Michael has offered $23.5/ share for Avantek and $15.25/share for Tandem. In this case, by selling 183000 shares of Avantek we will earn 183000*23.5 = $4300500 and by selling 320000 shares we need to pay 320000*16.25 = $5200000. Thus in this deal, we will not be able to earn a profit.
Thus I will not accept this offer. Greg didn’ t make any clear mistakes in the sell order. But as he made the offer to Steve before thus it is now a risky situation for Goldman. Michael will not give as good price as he would give if the offer went first to him. The trading cost for this potential package deal would be $5200000 for buying the 320000 shares of Tandem and they will earn $4300500 by selling the 183000 shares of Avantek.
Thus the cost of the trading for T. Rowe is $899500. From the case study, it can be said that Goldman Sachs had bid for 100 shares of Avantek for $24 3/8 per share and Goldman was asking $15 3/8 per share for Tandem. But it cannot be clearly said whether it was involved in any other specific trades during that day. From the given tables it can be seen that Goldman purchased the shares of Avantek at 12:23 pm when the share price was $24/share.
But just before one minute the price was at $24.75/share and after 12:23 pm the share price was also higher than $24/share. Thus it can be said that Goldman Sachs had purchased the shares at the lowest possible price prevailing in the market. Goldman sold the shares of Tandem at 12:22 pm at $15.25/share. Although the price hiked at 12:27 pm at 15.50/share the volume was quite low. Thus it can be said that Goldman also got profit by selling the bulk shares of Tandem at $15.25/share. In this current market structure when the competition is very high then Greg might have done this deal by increasing the price per share of Avantek as the valuation of Dollar has increased from 1984 to 2014.
We need to consider the environmental factors; in this current market situation, Greg should consider the future profitability of Tandem before purchasing the shares.