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What should be the share price after the repurchase

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Reference no: EM132585603

On June 9th, 2018 Harmony Corp announced a tender offer for 10% of its outstanding shares, claiming that they were "undervalued" by the market.

Suppose that before the repurchase was announced it had 4.5m shares outstanding, valued by the market at $13/share.

Unlike many repurchase programs, Harmony offered to buy back the shares at a premium: $15/share.

For the purposes of the problem, we will assume that anyone who held 10 shares was able to sell one of them for $15 (in fact, a Dutch auction was actually used to arrive at this price).

a. What should be the share price after the repurchase is completed? (ignore taxes and asymmetric information)

b. What should have happened to Harmony's share price when the repurchase was announced (you should take into account that only some of them will be tendered).

c. In fact, in the days following the announcement Harmony's share price climbed to close to $14.50/share and remained roughly at that level. Is this consistent with what you calculated above? Explain

Reference no: EM132585603

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