Monroe Electronics' projected net income and free cash flows are given above in thousands of dollars.Monroe expects their net income and increases in net working capital to increase by 6% per year.If Monroe were able to reduce its annual increase in working capital by 15% without affecting any other part of the business adversely,what would be the effect of this reduction on Monroe's value,given a cost of capital of 11%?

Question

Quizplus · Accepted Answer

D) Initial value = 86,000 / (0.11 - 0.06) = $1,720,000;
reducing working capital by 15%, starting working capital = 0.85 × 8000 = 6800;
final value = 87,200 / (0.11 - 0.06) = $1,744,000;
thus, an increase of $1,744,000 - $1,720,000 = $24,000

Monroe Electronics' Projected Net Income and Free Cash Flows Are