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.
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 32P
Related questions
Question
round to the nearest cent
Transcribed Image Text: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 to repurchase shares.
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?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning