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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 decide not to use the $200 million to expand and hold the cash instead is closest to:
A)$16.50.
B)$16.80.
C)$19.00.
D)$13.75.

Question

Quizplus · Accepted Answer

If Iota holds the cash, the value of the firm is the present value of future free cash flows plus the cash. The present value of $75 million perpetuity at 10% is $750 million. Adding the $200 million cash gives a total firm value of $950 million. Dividing by 50 million shares gives a price per share of $19.00.

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