Enterprise value of AMC Corporation = $400 million
Excess cash = $100 million
Number of outstanding shares = 10 million
AMC Corporation does not have any debt and the excess cash of the company is utilized to repurchase shares. Thus, the enterprise value would be changed to $600 million or $200 million.
- AMC’s share price prior to the share repurchase
Therefore, AMC’s share price prior to the share repurchase is $50.
- When enterprise value changed the share price after repurchase
Let AMC has distributed $100 for share repurchase for a share price of $50, then it would be repurchased
It indicates that the outstanding shares would be 10 – 2 = 8 million
When the enterprise value would be changed (goes up) to $600 million
Therefore, the share price would be $75 per share.
When the enterprise value would be changed (goes down) to $200 million
Therefore, the share price would be $25 per share.
- When enterprise value goes up then the share price after repurchase
AMC waits until the good news comes to do the share repurchase, AMC’s share price prior to share repurchase is calculated as shown below.
Share price prior to share repurchase
Let AMC distributes $100 million for share repurchase then an initial price of $70.
Number of share repurchased
Number of outstanding shares
When the enterprise value would be changed (goes up) to $600 million
AMC waits until the bad news comes to do not make the share repurchase, AMC’s share price prior to share repurchase is calculated as shown below.
Share price prior to share repurchase
Let AMC distributes $100 million for share repurchase then an initial price of $30.
Number of share repurchased
Number of outstanding shares
When the enterprise value would be changed (goes down) to $200 million
- Assume that AMC management has expected good news to come and want to maximize the ultimate share price, then they would purchase the shares well before the news comes out. Further, if AMC management has expected bad news to come out, then in such scenario the purchase of shares would be done after the news come out.
- It can be concluded based on part (d) that effect of purchase of share on the stock price is positive only when the shareholders are expecting growth and hence, there is an increase in the price of shares. However, if there is decay in earnings in the future, then the shareholder would take this aspect negatively and thus, the stock price would also decline.
Question 3
Valuation and M&A
Present value (PV) of Benefit incurred to Verizon would be same as the present value of perpetuity.
Benefit per year (D) = $25,000
Discount rate (R) = 10%
Fees charged by Levan Brothers to fir Verizon = $6,000
Present value of perpetuity =?
Now,
Present value of perpetuity
Total number of shares held by ABC and DEF = 50000 *99% =49,500
- Maximum price per share that firm Verizon is ready to pay to purchase remaining 99% of firm Yahoo by using all cash offer.
Maximum price per share
Therefore, the Maximum price per share would be $19.93.
- ABC’s gains needs to be calculated when it accepts all cash offer of $17 per share.
ABC’s gains
- ABC believes that DEF would accept the offer and also tender its shares. The optimal strategy for ABC to accept the offer or to decline the offer is highlighted below:
If ABC wants to accept the offer then it is essential that ABC should not sell their shares since post acquisition of DEF, Verizon would have requisite stake to bring about management change which in turn would lead to higher revenue and higher share price of Yahoo which would also be beneficial for ABC.
- It is apparent that Verizon has required only 50% shares for change of the management. Further, Verizon would offer the price x in order to make 49% share to 50%.
- Computation of gains or losses per share for Verizon when, all cash offer to acquire 99% of firm Yahoo and at a price of $20.
Maximum price that firm Verizon could offer is $19.93.
Loss per share (if Verizon accepts at $20) = $20 -$19.93 = $0.07 per share
- ABC believes that DFF would be ready to accept the cash offer (vice versa), then firm Verizon would need 50% shares and thus, the management would be changed. Here, strong possibility (100%) is that inefficient management team would change one day because Verizon just needs 49% shares in order to hold Yahoo.
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