AMS Company has unexpectedly generated a one-time extra $5 million in cash flow this year. After announcing
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Question:
AMS Company has unexpectedly generated a one-time extra $5 million in cash flow this year. After announcing the extra cashflow, AMS's stock price was $55 per share (it has 1 million sharesoutstanding). The managers are considering spending $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?
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?
Related Book For
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty
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