Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?
A) a decrease of $2.22 million
B) an increase of $12,500
C) an increase of $0.78 million
D) an increase of $2.08 million

Question

Quizplus · Accepted Answer

D) Currently, value of Franklin Industries using initial net working capital
= $2.5 million / (0.11 - 0.035) = $33.333 million;
Value of Franklin Industries using new net working capital
= $2.5 million / (0.11 - 0.03) = $31.25 million;
decrease in value = $33.333 million - $31.25 million = $2.083 million

Franklin Industries Has a Current Net Working Capital of $2