Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Institutions Management A Risk Management Approach

Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders

8th edition

978-0078034800, 78034809, 978-0071051590

More Books

Students also viewed these Finance questions

Question

1. Identify and discuss different types of business analysis.

Answered: 1 week ago

Question

3 Define the time value of money.

Answered: 1 week ago