Question

Nash Corporation, a building firm, is entirely financed by equity and has 50 million
shares with a current share price of $6 each. Nash has existing non-cash assets,
and $42 million cash.
The firm has also submitted a bid for a major new building contract. If the bid is
successful (good news) the contract will have a net present value of $52 million to
Nash. If it is unsuccessful (bad news) the contract will have zero value. Investors
believe it is equally likely that the bid will be successful or unsuccessful.
The market is semi-strong form efficient and all the above information is public
knowledge. There are no taxes or transactions costs. Assume that the managers of
Nash wish to maximise the firm’s share price.

(a) What is the market’s current estimate of the value of Nash’s existing non-cash
assets? (4 marks)
(b) Suppose Nash uses all its cash to repurchase shares before making a public
news announcement about the outcome of its bid for the new contract,
(i) How many shares will be repurchased? What will the share price be after the
repurchase? Why?
(ii) After the announcement, what will the share price be if the news is good?
What will the share price be if the news is bad?
(c) Suppose Nash makes the public news announcement before using all its cash
to repurchase shares.
(i) If there is good news about the contract, what will be the total value of Nash’s
equity after the announcement? How many shares will be repurchased and
what will the share price be after the repurchase?
(ii) If there is bad news about the contract, what will be the total value of Nash’s
equity after the announcement? How many shares will be repurchased and
what will the share price be after the repurchase?