AMS Company has unexpectedly generated a one-time extra $ 6 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 $ 6 million on a project that would generate a single cash flow of $ 6.5 million in one year, which they would then use to repurchase shares. Assume the cost of capital for the project is 13%.

a. If they decide on the investment, what will happen to the price per share?

b. If they instead use the $

6 million to repurchase stock immediately, what will be the price per share?

c. Which decision is better and why?