Use the Information for the Question(s)below

question 63

Essay

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.
-A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend,expansion or repurchase? Which provides the higher stock price?

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Definitions:

Embryonic

Relating to an embryo, the earliest stage of growth and development in many organisms.

Cleavage

The rapid rate of mitosis of a zygote immediately following fertilization.

Neonatal

Refers to the first four weeks after birth, a period that is critical for the child's survival and health.

Neonatal

Pertaining to the newborn period, specifically the first 28 days of life, focusing on medical care and conditions of newborn infants.