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question 63

Essay

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.
-A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend,expansion or repurchase? Which provides the higher stock price?

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Definitions:

Positive Correlation

A relationship between two variables in which both variables move in the same direction, meaning as one variable increases, so does the other, and vice versa.

External Validity

The extent to which the findings of a study can be generalized or applied to settings, populations, and times beyond the scope of the study itself.

Correlational Research

A type of research methodology that examines the relationship between two or more variables to determine if they are connected or correlated in some way.

Correlation Coefficients

A statistical measure that indicates the extent to which two variables fluctuate together. A value closer to 1 or -1 indicates a stronger relationship.