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question 62

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.
-Suppose that Iota is able to invest the $200 million in excess cash into a project that will increase future free cash flows by 30%.If you were advising the board,what course of action would you recommend,investing the $200 million in an expansion project that will raise future free cash flows by 30% or use the $200 million to repurchase shares? Which provides the higher stock price?

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Definitions:

Modus Tollens

A form of deductive argument that takes the form "If P, then Q. Not Q. Therefore, not P," which is used to derive a conclusion from a hypothesis by negation.

Hypothetical Syllogism

A logical argument consisting of two conditional statements and a conclusion that is logically inferred.

Modus Ponens

A form of deductive reasoning that asserts if a conditional statement "If P, then Q" is accepted as true and P is true, then Q must also be true.

Modus Tollens

A method of logical argument that infers the falsehood of a proposition from the impossibility of its consequence.