What is the NPV of MBMs expansion project

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Reference no: EM132063958

MBM Industries is an all-equity firm with 50 million shares outstanding. MBM 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%. MBM's cost of capital is 10%; assume that capital markets are perfect.

i. What is the value of MBM if it uses the £200 million to expand?

ii. What is the value of MBM if it does not use the £200 million to expand and holds the cash instead?

iii. What is the NPV of MBM’s expansion project?

iv. A member of MBM's board of directors suggests that MBM's stock price would be higher if they used the £200 million to repurchase shares instead of funding the expansion. If you were advising the board, what course of action would you recommend: expansion or repurchase? Which provides the higher stock price?

Reference no: EM132063958

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