Use the information for the question(s) below.

Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Iota's cost of capital is 10% and assume that capital markets are perfect.

13) The value of Iota if they use the $200 million to expand is closest to:

A) $825 million

B) $688 million

C) $840 million

D) $950 million

Answer: Explanation:

14) The value of Iota if they choose not to use the $200 million to expand and hold the cash instead is closest to:

A) $950 million

B) $825 million

C) $840 million

D) $688 million

Answer: Explanation:

15) The price per share of Iota if they use the $200 million to expand is closest to:

A) $13.75

B) $16.50

C) $19.00

D) $16.80

Answer: Explanation:

16) The price per share of Iota if they choose not to use the $200 million to expand and hold the cash instead is closest to:

A) $16.50

B) $16.80

C) $19.00

D) $13.75

Answer: Explanation:

17) The NPV of Iota's expansion project is closest to:

A) -$110 million

B) -$137.5 million

C) $0

D) $75 million

Answer: Explanation:

18) A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion. If you were advising the board, what course of action would you recommend: expansion or repurchase? Which provides the higher stock price?

Answer:

19) Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%. If you were advising the board, what course of action would you recommend: investing the $200 million in an expansion project that will raise future free cash flows by 30% or using the $200 million to repurchase shares? Which provides the higher stock price?

Answer: