Use the Information for the Question(s) Below

question 94

Multiple Choice

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 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

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Definitions:

Industry

The organized economic activity connected with the production, manufacture, or construction of goods and services.

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The expenses related to insuring a car against accidents, theft, and other risks.

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, as the cost per unit of output decreases with increasing scale.

Long-Run Average Cost Curve

A graphical representation that shows the lowest average cost at which a firm can produce any given level of output in the long run, when all inputs are variable.