Question

AMC Corporation currently has an enterprise value of $390 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 $590 million or $190 million. Suppose AMC management expects good news to come out. If management wants to maximize AMC'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? What effect would you expect an announcement of a share repurchase to have on the stock price? To maximize its share price, when will AMC prefer to repurchase shares? (Select the best choice below.)

A. After either good or bad news comes out.
B. Before good news and after bad news comes out.
C. After good news and before bad news comes out.
D. Before either good or bad news comes out.
Given your answer above, what effect would you expect an announcement of a share repurchase to have on the stock price? (Select the best choice below.)
a. An announcement of a share repurchase implies that management expects bad news to come out or that any good news has already come out, both of which could have a positive impact on the stock price.
b. An announcement of a share repurchase implies that management expects good news to come out or that any bad news has already come out, both of which could have a positive impact on the stock price.

Answer 1

AMC Corporation should repurchase shares before good news is expected to come out to maximize share price, as they can buy at lower prices prior to an anticipated boost in enterprise value. Conversely, they should repurchase after bad news if enterprise value is expected to decrease. The correct choice is B, before good news and after bad news comes out.

Step-by-step explanation:

Regarding whether AMC Corporation should undertake a share repurchase before or after good or bad news comes out, it depends on the expected impact on the stock price. If management expects good news, repurchasing shares before the news would allow them to buy back shares at a lower price. However, if they expect bad news, it would be advantageous to repurchase shares after the news when stock prices may have fallen.

If AMC management announces a share repurchase, it typically implies confidence in the firm's future prospects, potentially leading to a positive impact on the stock price. This is because a repurchase can indicate that management believes the stock is undervalued or that they want to return value to shareholders, which can boost investor confidence and, subsequently, the stock price.

Thus, to maximize the share price, AMC should repurchase shares before the good news comes out, under expectation of a rise in the enterprise value, and after the bad news if they anticipate a decrease. The correct answer is, therefore, B. Before good news and after bad news comes out.