Prada Has Ten Million Shares Outstanding, Generates Free Cash Flows

question 14

Multiple Choice

Prada has ten million shares outstanding, generates free cash flows of $ 50 million each year and has a cost of capital of 10%. It also has $50 million of cash on hand. Prada wants to decide whether to repurchase stock or invest the cash in a project that generates free cash flows of $5 million each year. Should Prada invest or repurchase the shares?

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

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Definitions:

Asset Value

Asset value is the total value of a company's or individual's assets, calculated by summing the market value of all tangible and intangible items.

Net Asset Value

The total value of a fund's assets minus its liabilities, often used in the context of mutual and exchange-traded funds.

Investment Company

A trust or corporation that focuses on deploying the aggregated investments of individuals into financial securities.

Mutual Fund Assets

The total market value of all financial assets held by a mutual fund.