Prada has ten 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?

Question

Quizplus · Accepted Answer

The project generates a return of $2 million on $40 million, which is a 5% return, lower than the 10% cost of capital. Repurchasing shares would be a better use of cash.

Prada Has Ten Million Shares Outstanding, Generates Free Cash Flows