Prada Has 10 Million Shares Outstanding, Generates Free Cash Flows

question 74

Multiple Choice

Prada has 10 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:

Heuristic

A problem-solving approach that employs a practical method or various shortcuts to produce solutions that may not be perfect but are sufficient for the immediate goals.

Divergent

Thinking or a thought process that generates creative ideas by exploring many possible solutions, contrasting with convergent thinking.

Subgoals

Intermediate objectives set as part of a strategy to achieve a larger goal, helping to organize efforts and measure progress.

Working Backwards

Working backwards is a problem-solving strategy that involves starting with the conclusion or desired outcome and then deducing the steps needed to reach that outcome.