Question
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
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