AMC Corporation currently has an enterprise value of $400 million and $100 million inexcess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses itsexcess cash to repurchase shares. After the share repurchase, news will come out that willchange AMC’s enterprise value to either $600 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? Whatis 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. Whatis AMC’s share price after the repurchase if its enterprise value goes up? What isAMC’s share price after the repurchase if its enterprise value declines?d. Suppose AMC management expects good news to come out. Based on your answersto parts b and c, if management desires to maximize AMC’s ultimate share price, willthey undertake the repurchase before or after the news comes out? When wouldmanagement undertake the repurchase if they expect bad news to come out?e. Given your answer to part d, what effect would you expect an announcement of ashare repurchase to have on the stock price? Why?

a. AMC's share price prior to the share repurchase can be calculated by subtracting the excess cash from the enterprise value and then dividing by the number of shares outstanding. So, ($400 million -$100 million) / 10 million shares = $30 per share.

b. If AMC uses its excess cash to repurchase shares, it will spend $100 million to do so. If the enterprise value goes up to$600 million afterwards, the new share price can be calculated by subtracting the cash used for the repurchase from the new enterprise value and dividing by the new number of shares outstanding. Assuming all the excess cash is used to repurchase shares at the initial price of $30, the number of shares repurchased would be$100 million / $30 = 3.33 million shares. So, the new number of shares outstanding would be 10 million - 3.33 million = 6.67 million shares. The new share price would then be ($600 million - $100 million) / 6.67 million shares =$75 per share. If the enterprise value declines to $200 million, the new share price would be ($200 million - $100 million) / 6.67 million shares =$15 per share.

c. If AMC waits until after the news comes out to do the share repurchase, the share price after the repurchase will depend on the new enterprise value. If the enterprise value goes up to $600 million, the share price would be$600 million / 10 million shares = $60 per share. If the enterprise value declines to$200 million, the share price would be $200 million / 10 million shares =$20 per share.

d. If AMC management expects good news to come out, they should undertake the repurchase before the news comes out to maximize AMC’s ultimate share price. This is because the share price after the repurchase is higher when the enterprise value goes up if the repurchase is done before the news comes out ($75 vs$60). If they expect bad news to come out, they should wait until after the news comes out to do the repurchase, as the share price after the repurchase is higher when the enterprise value declines if the repurchase is done after the news comes out ($20 vs$15).

e. Given the answer to part d, an announcement of a share repurchase would likely lead to an increase in the stock price. This is because the announcement signals to the market that the company's management believes the stock is currently undervalued. Furthermore, a share repurchase reduces the number of shares outstanding, which increases earnings per share and often leads to an increase in the stock price.

a. The share price prior to the share repurchase can be calculated by dividing the enterprise value by the number of shares outstanding. So, $400 million / 10 million shares =$40 per share.

b. If the enterprise value goes up to $600 million after the repurchase, the new share price can be calculated by first subtracting the cash used for the repurchase from the new enterprise value, and then dividing by the new number of shares outstanding. The number of shares repurchased with$100 million at $40 per share is 2.5 million, so the new number of shares outstanding is 10 million - 2.5 million = 7.5 million. Therefore, the new share price is ($600 million - $100 million) / 7.5 million =$66.67 per share. If the enterprise value declines to $200 million, the new share price is ($200 million - $100 million) / 7.5 million =$13.33 per share.

c. If AMC waits until after the news comes out to do the share repurchase, the share price after the repurchase if its enterprise value goes up would be $600 million / 10 million =$60 per share. If the enterprise value declines, the share price would be $200 million / 10 million =$20 per share.

d. If AMC management expects good news to come out, they should undertake the repurchase before the news comes out to maximize AMC’s ultimate share price, as the share price would be higher after the repurchase if the enterprise value goes up. If they expect bad news to come out, they should undertake the repurchase after the news comes out, as the share price would be higher after the repurchase if the enterprise value declines.

e. An announcement of a share repurchase would likely have a positive effect on the stock price, as it signals to the market that the company believes its shares are undervalued. Additionally, a share repurchase reduces the number of shares outstanding, which can increase earnings per share and potentially lead to a higher stock price.