AMS Company has unexpectedly generated a one-time extra $5 million in cash-flow this year. After announcing the
Question:
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 $60 per share
(it has 1 million shares outstanding). 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 15%.
a. If they decide on the investment, what will happen to the price per share?
b. If they instead use the $5 million repurchase stock immediately, what will be the price per share?
c. Which decision is better and why?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781292437156
5th Global Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford