Malibu Mannequins Is an All-Equity Firm with 40 Million Shares

question 76

Multiple Choice

Malibu Mannequins is an all-equity firm with 40 million shares outstanding.Malibu has $20 million in cash,and expects future free cash flows of $5 million per year.The cash can be used to expand the firm's future operations,increasing future free cash flows to $8 million per year.If Malibu's cost of capital for the expansion is 5%,what will be the difference in the firm's share price compared to using the cash for a share repurchase?

• A)Share price is $1.00 higher with expansion.
• B)Share price is $1.00 higher with repurchase.
• C)Share price is the same with both options.
• D)Share price is $1.50 higher with expansion.
• E)Share price is $1.50 higher with repurchase.

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Definitions:

Cash Budget

is a financial plan that estimates cash inflows and outflows over a specific period of time, often used for managing liquidity and ensuring financial stability.

Inflows And Outflows

Terms referring to the movement of money into and out of a business or account, representing income and expenses or investments and withdrawals, respectively.

Sales Budget

A sales budget estimates the amount of revenue a company expects to earn from sales over a specific period, serving as a planning and control tool for managing operations.

Direct Labor Cost

The total cost of workforce directly involved in the manufacturing of a product, including wages and salaries.