Question

AMC Corporation currently has an enterprise value (EV) of $370 million and $130 million in excess cash. The firm has 20 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 $570 million or $170 million. Suppose AMC waits until after the news comes out to do the share repurchase. What would AMC's share price be after the repurchase if its enterprise value goes up? What would AMC's share price be after the repurchase if its enterprise value declines?

Answer 1

The share price after the repurchase will depend on the change in AMC's enterprise value. If the enterprise value goes up, the share price will be higher. If the enterprise value declines, the share price will be lower.

Step-by-step explanation:

To calculate the share price after the share repurchase, we need to understand the impact of the change in enterprise value.

If AMC's enterprise value goes up to $570 million, the excess cash of $130 million will be deducted from the new enterprise value. So, the new enterprise value after the repurchase would be $440 million. Divide this by the new number of shares outstanding, which is 20 million minus the number of shares repurchased, to get the new share price.

If AMC's enterprise value declines to $170 million, the excess cash of $130 million will still be deducted from the new enterprise value. So, the new enterprise value after the repurchase would be $40 million. Divide this by the new number of shares outstanding, which is 20 million minus the number of shares repurchased, to get the new share price.