AMS Company has unexpectedly generated a one-time extra $5 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 $5 million on a project that would generate a single cash flow of $5.5 million in one year, which they would then use Assume the cost of capital for the project is 14%. a. If they decide on the investment, what will happen to the price per share? b. If they instead use the $5 million to repurchase stock immediately, what will be the price per share? c. Which decision is better and why? o repurchase shares.

AMS Company has unexpectedly generated a one-time extra $5 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 $5 million on a project that would generate a single cash flow of $5.5 million in one year, which they would then use Assume the cost of capital for the project is 14%. a. If they decide on the investment, what will happen to the price per share? b. If they instead use the $5 million to repurchase stock immediately, what will be the price per share? c. Which decision is better and why? o repurchase shares.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 9P

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