Question: 13) AMS Company has unexpectedly generated a one-time extra $5 million in cash flow this year. After announcing the extra cash flow, AMS stock price

13) AMS Company has unexpectedly generated a one-time extra $5 million in cash flow this year. After announcing the extra cash flow, AMS stock price was $65 per share (it has 1 million sharesoutstanding). The managers are considering spending the $5 million on a project that would generate a single cash flow of $5.5 million in one year, which they would then use to repurchase shares. Assume the cost of capital for the project is 12%.

a. If they decide on the investment, what will happen to the price per share? Round to nearest cent.

b. If they instead use the $5 million to repurchase stock immediately, what will be the price per share?

c. Which decision is better and why?

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