AMS Company has unexpectedly generated a one-time extra $5 million in cash-flow this year. After...
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- 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 $60 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 repu rchase shares. Assume the cost of capital for the project is 15%.
- If they decide on the investment, what will happen to the price per share?
- If they instead use the $5 million repu rchase stock immediately, what will be the price per share?
- Which decision is better and why?
- If they decide on the investment, what will happen to the price per share?
- If they instead use the $5 million repu rchase stock immediately, what will be the price per share?
- Which decision is better and why?
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