Question 1Dividend Policy [8points]

Zoom Corporation currently has a share price of $12.50 and $50 million in cash. The firm has 20 million shares outstanding and no debt. Suppose Zoom wants to use all of its cash to repurchase shares. After the share repurchase, news will come out that will change Zoom's Enterprise Value to either $300 million or $100 million.

a) What will Zoom's share price be in case the enterprise value goes up? What will Zoom's share price be in case the enterprise value declines? (Hint: Rememberthat the news will come out afterthe share repurchase. Remember that Enterprise Value = Equity + Debt Cash)

b) Suppose Zoom waits until after the news comes out to do the share repurchase, what would Zoom's share price be after the repurchase if its enterprise value goes up? What would Zoom's share price be after the repurchase if its enterprise value declines?

c) Suppose Zoom management expects good news to come out. Based on your answers to parts (a) and (b), if management wants to maximize Zoom's ultimate share price, will they undertake the repurchase before or after the news comes out? What would management do if they expectbad news to come out?

d) Given your answers to part d, what effect would you expect an announcement of a sharerepurchase to have on the stock price? Why?