Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 to repurchase stock immediately, what will be the price per share? c. Which decision is better and why?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

7th Edition

007331465X, 978-0073314655

More Books

Students also viewed these Finance questions

Question

Should job descriptions be abandoned in recruitment and selection?

Answered: 1 week ago