Hi....need help with calculations using cell references. Thanks. Berk_DeMarzo_Pr

Question

Hi....need help with calculations using cell references. Thanks.

Berk_DeMarzo_Problem 17-29_Start.xlsx [Read-Only] - Excel Odessa Mathis - File Insert Page Layout Formulas Data Review ViewTell me what you want to do Cut Be Copy AutoSum A Times New Roma 114 AA B 1 u· ··A· Wrap Text General Paste Merg $. % , '68A Conditional Format as Cel Insert Delete Format Sort & Find & e & Center Format Psinter Formatting Table Styles- Clear Filter Select Clipboard Number Cells Editing D44 Problem 17-29 AMC Corporation curently has an enterprise value of S400 millon 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 vaue to either S600 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 vaue 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 AMCs ultimate share price, wll 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 answers to part (d), what would you expect an announcement of a share repurchase prior to the news to have on the stock price? Why? Enterprise value before announcement (million) Excess cash (million) 17-29 Ready - + 80%

Explanation / Answer

Note : It is assumed that excees cash balance is included in the Value of AMC Corporation.

a) Share price before repurchase = 400m / 10m = $ 40 per share

b) No. of shares which could be repurchased was (100m/40) = 2.5 million shares.

Therefore Current outstanding Shares = 7.5 million.

High Share price post purchase = (600 - 100)m / 7.5 m = $ 66.67 per share

   Low Share price post purchase = (200 - 100)m / 7.5 m = $ 13.33 per share

c) Value goes upto $600m:

Value per share = 600m / 10m = $ 60 per share.

No. of share repurchased = 100 m /60 = 1.67 million

Leftover shares = 10 - 1.67 = 8.33 million

Value per share after repurchase = (600 - 100) / 8.33 = $ 60 per share (will remain same)

Value downs upto $200m:

Value per share = 200m / 10m = $ 20 per share.

No. of share repurchased = 100 m /20 = 5 million

Leftover shares = 10 - 5 = 5 million

Value per share after repurchase = (200 - 100) / 5 = $ 20 per share (will remain same)

d) If management expects the news to be good, it will benefit if they repurchase before the news is released. (explanation: Value of share after repurchase is higher is subpart (b) as compared to subpart (c)).

If management expects the news to be bad, it will benefit if they repurchase after the news is released. (explanation: Value of share after repurchase is higher is subpart (c) as compared to subpart (b)).

e)You would expect the share price to rise , because the announcement will mean that good news is about to be released.

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