AMC Corporation currently has an enterprise value of

$300

million and

$125

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

$500

million or

$100

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?

To maximize its share price, AMC will prefer to repurchase shares (Select the best choice below.)

A.

Before either good or bad news comes out.

B.

After either good or bad news comes out

C.

After good news and before bad news comes out.

D.

Before good news and after bad news comes out.

e. Given your answer to

(d),

what effect would you expect an announcement of a share repurchase to have on the stock price? Why? (Select the best choice below.)

A) An announcement of a share repurchase implies that management expects good news to come out or that any bad news has already come out, both of which could have a positive impact on the stock price.

B) An announcement of a share repurchase implies that management expects bad news to come out or that any good news has already come out, both of which could have a positive impact on the stock price.