Accountancy
Stark Inc. is a listed company with 300 million shares outstanding. It has $300 million in cash and is expecting future free cash flow of $150 million per year in perpetuity. The management is planning to use the $300 million cash to finance an expansion. The expansion is expected to increase future free cash flows by 10%. As a result of this expansion, Stark Inc. is expected to incur costs of $15 million per year for 5 years. Alternatively, Stark Inc. can use the cash to undertake a share repurchase exercise. Assume Stark Inc’s cost of capital is 11%
a) What will be the impact of these actions on Stark Inc’s share price? Advice Stark Inc. on the best course of action. (15 marks)
b) Discuss two (2) other factors Stark should consider before choosing between the share repurchase or expansion plan. (5 marks)
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