Question
The NBC Corporation has $2 million in free cash flows and is trying to determine how to allocate that capital among internal growth, payment of
The NBC Corporation has $2 million in free cash flows and is trying to determine how to allocate that capital among internal growth, payment of dividends, or share buybacks. NBC has the opportunity to pursue internal growth, which requires an investment of $2 million and has a NPV of $3.2 million.
They can also enter into a dividend paying program whereby it an offer a $2.00 dividend to each of its one million shareholders.
Finally, the firm can enter into a Stock-Buyback program where it will buy back 200,000 shares at $10 per share.
What action by the firm would most likely result in the creation of value?
a. | Offer a $1 dividend and use the remaining $1 million to purchase shares. | |
b. | Distribute $2 million through a share buyback program. | |
c. | Use the $2 million for the organic growth projects. | |
d. | Distribute $2 million in dividends. |
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