Vega Music's projected net income and free cash flows are given above in thousands of dollars.Vega expects their net income and increases in net working capital to increase by 5% per year.If Vega were able to reduce its annual increase in working capital by 10% without affecting any other part of the business adversely,what would be the effect of this reduction on Vega's value,given a cost of capital of 13%?

Question

Quizplus · Accepted Answer

C) Initial value = 57,000 / (0.13 - 0.05) = $712,500,000;
reducing working capital by 10%, starting working capital = 0.9 × 2000 = 1800;
final value = 57,200 / (0.13 - 0.05) = $715,000,000;
thus, an increase of $715,000,000 - $712,500,000 = $2,500,000

Vega Music's Projected Net Income and Free Cash Flows Are