The Rolleston Company (TRC), an all-equity financed company, generates perpetual free cash flow of $40 million. It holds $100 million of cash, has 50 million shares outstanding, and its shareholders require a 10 percent return on their investment in the firm. TRC management wants to invest the $100 million of cash in a project that would raise the firm’s future free cash flow by 20 percent without changing the firm’s risk. Markets are assumed to be perfect. Answer the following questions: 

a. What is TRC’s share price before it invests the $100 million?

b. What would be TRC’s share price if it went ahead with the investment?

c. What is the net present value of the investment? Should TRC make the investment?

d. Should TRC’s management use the $100 million of cash to buy back its shares instead of going ahead with the investment?