Lota Industries is a capital company with 50 million shares outstanding. Iota has $200 million in cash

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Question:

Lota Industries is a capital company with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the company's operations, which in turn will increase free cash flows by 12%. Iota's cost of capital is 10%. Assume that the capital markets are perfect.

(a) The value of Iota if they use the $200 million to expand is closest to:

(1) $825 million (2) $688 million (3) $840 million (4) $950 million

(b) The value of Iota if they do not use the $200 million to expand and keep the cash in place is closer to:

(1) $840 million (2) $825 million (3) $950 million (4) $688 million

(c) The price per share of Iota if they use The $200 million to expand is closest to:

(1) $13.75 (2) $16.50 (3) $19.00 (4) $16.80

(d) Iota's share price if they don't use the $200 million to expand and keep cash in your place is closest to:

(1) $16.50 (2) $16.80 (3) $19.00 (4) $13.75

(e) The NPV of the Iota expansion project is closest to:

(1) -$110 million (2) -$137.5 million (3) $0 (4) $75 million

(f) A member of the board of directors of Iota suggests that Iota's share price would be higher if they used the $200 million to buy back shares instead of financing expansion. If you were advising the board, what course of action would you recommend, expansion or repurchase? Which provides the highest stock price? Explain.

(g) Suppose that Iota can invest the $200 million in excess cash in a project that will increase future cash flows by 30%. If you were advising the board, what course of action would you recommend, invest the $200 million in an expansion project that will increase future free cash flows by 30%, or use the $200 million to buy back shares? Which provides the highest stock price? Explain.