Use the information for the question(s)below.
Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-The price per share of Iota if they use the $200 million to expand is closest to:
A)$13.75.
B)$16.50.
C)$19.00.
D)$16.80.

Question

Quizplus · Accepted Answer

The correct answer is D.The price per share of Iota if they use the $200 million to expand is closest to $16.80. This is because the expansion will increase future free cash flows by 12%, which will increase the value of the firm. The value of the firm is equal to the present value of its future free cash flows, which is $200 million + $75 million * (1 + 0.12)^-1 / 0.10 = $1.008 billion. The price per share is equal to the value of the firm divided by the number of shares outstanding, which is $1.008 billion / 50 million = $16.80.

Use the Information for the Question(s)below