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Firm A is all equity with 100M shares outstanding. The firm has $150M in cash and expects future free cash flows of $65M/year. The management plans to use the cash available to expand the firm’s operations. The expansion will increase future free cash flows by 12%. Assume that the appropriate annual discount rate for the firm is 10%. 1. Compute the current share price of Firm A. 2. Compute the share price of Firm A if the company decides to use the cash available for a share repurchase at no premium. Show your answer. 3. Compute the share price of Firm A if the company decides to expand its operations. 4. Comment on the results obtained in parts (2) and (3). 5. Firm A believes that its shares are underpriced and that the true value is $10. The management expects that new information will come out soon and investors will revise their opinions and agree on a $10 share value for Firm A. If Firm A plans to use the $150M cash for a share repurchase, should it wait until the new information comes out or not? Show your answer.
Year Account balance, beginning of year" "Deposit at beginning of year" "Interest earned during year" "Total in account, end year"
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