Prada Has Ten Million Shares Outstanding, Generates Free Cash Flows

question 32

Multiple Choice

Prada has ten million shares outstanding, generates free cash flows of $60 million each year and has a cost of capital of 10%. It also has $40 million of cash on hand. Prada wants to decide whether to repurchase shares or invest the cash in a project that generates free cash flows of $2 million each year. Should Prada invest or repurchase the shares?

• A) repurchase
• B) indifferent between options
• C) invest
• D) cannot say for sure

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Definitions:

Identical Firms

Companies that offer the same products or services and operate in the same market with similar strategies and resources.

Cost Data

Information regarding the expenses incurred in the production, operation, or acquisition of goods and services.

MC Curve

Represents the marginal cost curve, which shows the cost of producing an additional unit of a good or service.

Technological Advance

The development of new technologies and improvement of existing technologies to increase productivity or address new challenges.