7. An all-equity firm has 100 million shares outstanding and $100 million in cash. The firm expects future free cash flows of $100 million per year. Management plans to use the $100 million cash to expand the firm's operations, which will in turn increase future free cash flows by 30%. If the cost of capital of the firm is 20%, and the expansion does not change the firm's cost of capital, how would a decision to use the cash for a share repurchase instead of the expansion change the share price? A) Share price will increase by $1.50 per share B) Share price will decrease by $1.50 per share C) Share price will increase by $0.50 per share D) Share price will decrease by $0.50 per share E) Share price will remain unchanged

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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7. An all-equity firm has 100 million shares outstanding and $100 million in cash. The firm
expects future free cash flows of $100 million per year. Management plans to use the $100
million cash to expand the firm's operations, which will in turn increase future free cash
flows by 30%. If the cost of capital of the firm is 20%, and the expansion does not change
the firm's cost of capital, how would a decision to use the cash for a share repurchase instead
of the expansion change the share price?
A) Share price will increase by $1.50 per share
B) Share price will decrease by $1.50 per share
C) Share price will increase by $0.50 per share
D) Share price will decrease by $0.50 per share
E) Share price will remain unchanged
Transcribed Image Text:7. An all-equity firm has 100 million shares outstanding and $100 million in cash. The firm expects future free cash flows of $100 million per year. Management plans to use the $100 million cash to expand the firm's operations, which will in turn increase future free cash flows by 30%. If the cost of capital of the firm is 20%, and the expansion does not change the firm's cost of capital, how would a decision to use the cash for a share repurchase instead of the expansion change the share price? A) Share price will increase by $1.50 per share B) Share price will decrease by $1.50 per share C) Share price will increase by $0.50 per share D) Share price will decrease by $0.50 per share E) Share price will remain unchanged
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