AMS Company has unexpectedly generated a one-time extra $5 million in cash flow this year....
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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 $55 per share (it has1 million shares outstanding). The managers are considering spending $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 11%.
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?
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