Question
Zoom Corporation currently has an enterprise value of $200 million and $50 million in excess cash. The firm has 20 million shares outstanding and no
Zoom Corporation currently has an enterprise value of $200 million and $50 million in excess cash. The firm has 20 million shares outstanding and no debt. Suppose Zoom uses its excess 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 is Zoom's share price prior to the share repurchase?
b)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 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? Whatwould Zoom's share price be after the repurchase if its enterprise value declines?
d)SupposeZoom management expects good news to comeout.Based on your answers to parts (b) and (c), if management wants to maximize Zoom'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?
Given your answers to part d, what effect would you expect an announcement of a share repurchase to have on the stock price? Why?
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