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AMC Corporation currently has an enterprise value of $400 million and $100
million in excess cash. The firm has 10 million shares outstanding and no debt.
Suppose AMC uses its excess cash to repurchase shares. After the share
repurchase, news will come out that will change AMC’s enterprise value to
either $600 million or $200 million.

A. What is AMC’s share price prior to the share repurchase?

B. What is AMC’s share price after the repurchase if its enterprise value
goes up? What is AMC’s share price after the repurchase if its enterprise
value declines?

C. Suppose AMC waits until after the news comes out to do the share
repurchase, what is AMC’s share price after the repurchase if its
enterprise value goes up? What is AMC’s share price after the
repurchase if its enterprise value declines?

D. Suppose AMC management expects good news to come out. Based on
your answers to parts B and C, if management desires to maximize
AMC’s ultimate share price, will they undertake the repurchase before
or after the news comes out? When would management undertake the
repurchase if they expect bad news to come out?

E. Given your answer to part D, what effect would you expect an
announcement of a share repurchase to have on the stock price? Why?

Sagot :

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