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A firm has to choose how to allocate free cash flows among organic growth, dividends, and share buybacks. If a firm that has a free
A firm has to choose how to allocate free cash flows among organic growth, dividends, and share buybacks. If a firm that has a free cashflow of $1 million has the opportunity to: invest $1 million in a new product that will earn cashflow with a present value of $0.9 million; offer a $1 dividend to each of its one million shareholders; or buy back 100,000 shares at $10 each, choose all options that are not value-creating. 1. Conduct the share buyback program costing $1 million. 2. Offer a $0.50 dividend and use the remaining $500,000 to purchase 50,000 shares. 3. Distribute $1 million in dividends. 4. Use the $1 million to invest in the new product. 5. Retain $1 million for other investment opportunities
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