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...


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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 $45 per share (it has 1 million shares<br>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.<br>Assume the cost of capital for the project is 14%.<br>a. If they decide on the investment, what will happen to the price per share?<br>b. If they instead use the $5 million to repurchase stock immediately, what will be the price per share?<br>c. Which decision is better and why?<br>

Extracted 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?

Jun 10, 2022
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