Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 $45 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 12%. 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? a. If they decide on the investment, the price per share will be $ 44.80. (Round to the nearest cent.) b. If they instead use the $6 million to repurchase stock immediately, the price per share will be $ nothing

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

More Books

Students also viewed these Accounting questions