AMC Corporation currently has an enterprise value of $450 million and $125 million in excess cash. The firm has 10 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 $650 million or $250 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? What is​ 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. What is​ AMC's share price after the repurchase if its enterprise value goes​ up? What is​ AMC's share price after the repurchase if its enterprise value​ declines?

d. Suppose AMC management expects good news to come out. Based on your answers to parts ​(b​) and ​(c​), if management desires 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?

e. Given your answer to ​(d​), what effect would you expect an announcement of a share repurchase to have on the stock​ price? Why?

AMC Corporation currently has an enterprise value of $ 400 million and $ 125

million in excess cash. The firm has 10 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 $ 600 million or $ 200million.

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? What is​ 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. What is​ AMC's share price after the repurchase if its enterprise value goes​ up? What is​ AMC's share price after the repurchase if its enterprise value​ declines?

d. Suppose AMC management expects good news to come out. Based on your answers to parts​(b​) and ​(c​), if management desires 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?

e. Given your answer to ​(d​), what effect would you expect an announcement of a share repurchase to have on the stock​ price? Why?

Question 1 – Payout Policy

AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 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 $600 million or $200 million.

Required:

1. What is AMC’s share price prior to the share repurchase?
2. What is AMC’s share price after the repurchase if its enterprise value goes up? What is AMC’s share price after the repurchase if its enterprise value declines?
3. Suppose AMC waits until after the news comes out to do the share repurchase. What is AMC’s share price after the repurchase if its enterprise value goes up? What is AMC’s share price after the repurchase if its enterprise value declines?
4. Suppose AMC management expects good news to come out. Based on your answers to requirements (2) and (3), if management desires 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?
5. Given your answer to requirement (4), what effect would you expect an announcement of a share repurchase to have on the stock price? Why?
6. do in the word file or excel file

AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 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 $600 million or $200 million.

1. What is AMC’s share price prior to the share repurchase?

2. What is AMC’s share price after the repurchase if its enterprise value goes up? What is AMC’s share price after the repurchase if its enterprise value declines?

3. Suppose AMC waits until after the news comes out to do the share repurchase. What is AMC’s share price after the repurchase if its enterprise value goes up? What is AMC’s share price after the repurchase if its enterprise value declines?

4. Suppose AMC management expects good news to come out. Based on your answers to parts b and c, if management desires 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?

5. Given your answer to part d, what effect would you expect an announcement of a share repurchase to have on the stock price? Why?

Assume the following data for TONINO Corp:

• Expected EBIT = $160 million (in perpetuity)
• Cost of unlevered equity = 8%
• Market risk premium = 5%
• Risk free rate = 4%
• The corporate tax rate =25%
• Currently TONINO is unlevered with twenty-million shares outstanding. Before the market opens TONINO will announce the change of capital structure from all equity finance to a debt-equity ratio of 0.5. Consol bonds (perpetuities) will be issued to repurchase shares of common stock 8 days after the announcement. The investment grade of Bonds is AAA and are considered riskfree. Assume markets are efficient in the semi-strong form.

Based on above information calculate:

1. The value of the firm unlevered
2. The share price of the firm unlevered
3. The cost of equity of the levered firm.
4. The weighted average cost of capital
5. The value of the firm levered using r_wacc
6. The share price of the firm immediately after announcing the change of capital structure from unlevered to levered.
7. Value of debt to be issued (8 days after the announcement)
8. #shares to be repurchased with debt (8 days after the announcement)
1. # shares outstanding after the repurchase
10. Value of equity (S^L)
11. Price of stock after the share repurchase with bonds (6 days after the announcement)
12. EPS^L
13. ROE^L
14. The value of the firm based on MM proposition I with corporate tax
15. Which capital structure should the firm select when corporate taxes are included (unlevered or levered)? Explain.

Draw a network diagram and answer the questions below:
(Please show all your workings or explanation; simple answers alone will not account for full marks)

• Activity 1 can start immediately and has an estimated duration of three weeks.
• Activity 2 can start after activity 1 is completed and has an estimated duration of three weeks.
• Activity 3 can start after activity 1 is completed and has an estimated duration of six weeks.
• Activity 4 can start after activity 2 is completed and has an estimated duration of eight weeks.
• Activity 5 can start after activity 4 is completed and after activity 3 is completed. This activity takes four weeks.
. The resource working on activity 3 is replaced with another resource who is less experienced. The activity will now take 10 weeks. How will this affect the project?
Questions are:
6. Using the original information, after some arguing between stakeholders, a new activity 6 is added to the project. It will take 11 weeks to complete and must be completed before activity 5 and after activity 3. Management is concerned that adding the activity will add 11 weeks to the project. Another stakeholder argues the time will be less than 11 weeks. Who is correct?

7. Based on the information in number 6 above, how much longer will the project take?

Morrissey Technologies Inc.'s 2019 financial statements are shown here.

Suppose that in 2020, sales increase by 15% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 89.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

1. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Do not round intermediate calculations. Round your answers to the nearest cent.
   

   Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020
   	2019		2020
   Sales	$3,600,000		$
   Operating costs (includes depreciation)	3,279,720
   EBIT	$320,280		$
   Interest expense	20,280
   EBT	$300,000		$
   Taxes (25%)	75,000
   Net Income	$225,000		$
   Dividends (60%)	$		$
   Addition to retained earnings	$		$

   Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2020
   	2019		2020
   Assets
   Cash	$180,000		$
   Accounts receivable	360,000
   Inventories	720,000
   Fixed assets	1,440,000
   Total assets	$2,700,000		$
   Liabilities and Equity
   Payables + accruals	$540,000		$
   Short-term bank loans	56,000
   Total current liabilities	$596,000		$
   Long-term bonds	100,000
   Total liabilities	$696,000		$
   Common stock	1,800,000
   Retained earnings	204,000
   Total common equity	$2,004,000		$
   Total liabilities and equity	$2,700,000		$

2. 
   
3. If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Do not round intermediate calculations. Round your answer to two decimal places.

Morrissey Technologies Inc.'s 2019 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2019 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Morrissey Technologies Inc.: Income Statement for December 31, 2019 Sales $3,600,000 Operating costs including depreciation 3,279,720 EBIT $320,280 Interest 20,280 EBT $300,000 Taxes (25%) 75,000 Net Income $225,000 Per Share Data: Common stock price $45.00 Earnings per share (EPS) $2.25 Dividends per share (DPS) $1.35 Suppose that in 2020, sales increase by 20% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 90% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Do not round intermediate calculations. Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020 2019 2020 Sales $3,600,000 $ 4320000 Operating costs (includes depreciation) 3,279,720 3888000 EBIT $320,280 $ 432000 Interest expense 20,280 61920 EBT $300,000 $ Taxes (25%) 75,000 Net Income $225,000 $ Dividends (60%) $ $ Addition to retained earnings $ $ Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2020 2019 2020 Assets Cash $180,000 $ Accounts receivable 360,000 Inventories 720,000 Fixed assets 1,440,000 Total assets $2,700,000 $ Liabilities and Equity Payables + accruals $540,000 $ Short-term bank loans 56,000 Total current liabilities $596,000 $ Long-term bonds 100,000 Total liabilities $696,000 $ Common stock 1,800,000 Retained earnings 204,000 Total common equity $2,004,000 $ Total liabilities and equity $2,700,000 $ If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Do not round intermediate calculations. Round your answer to two decimal places.

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $125,000 of invested capital would be needed.

Required:

1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired. (Round your answers to 2 decimal places (i.e., .1234 should be entered as 12.34).)

Compute the ROI of the competitor as it is now and after the intended upgrade.

Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading. (Round your answer to 2 decimal place. (i.e., .1234 should be entered as 12.34).)

Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.