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 \($55\) 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 12%.

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?

AMC Corporation currently has an enterprise value of \($400\) million and \($100\) million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come out that will change AMC’s enterprise value to either \($600\) million or \($200\) million.