Prada has nine million shares outstanding, generates free cash flows of $ 40 million each year and has a cost of capital of 10%. It also has $30 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

Question

Quizplus · Accepted Answer

C) Repurchases do not change stock prices. So the question is whether the project has positive NPV. NPV of the cash flows at the cost of capital equals
$5 million / 10% - $30 million = $20 million.

Prada Has Nine Million Shares Outstanding, Generates Free Cash Flows