Furniture Depot is a retail chain selling furniture and appliances. The firm has an after-tax operating income of $250 million in the current year on revenues of $5 billion. The firm also has a non-cash working capital of $1 billion. The net capital expenditures this year is $100 million and expects revenues, operating income, and net capital expenditures to grow 5% a year forever. The firm's cost of capital is 9%.

a. Assume that non-cash working capital remains at the existing percent of revenues, estimate the value of the firm.

b. Assume now that the firm is able to reduce its non-cash working capital requirement by 50%. Estimate the effect on the value of this change.

c. If as a consequence of this non-cash working capital change, earnings growth declines to 4.75%, what would the effect on value be of the drop in non-cash working capital?

Answer rating: 100% (QA)

A Value of the firm Operating income nonworking capital capital expenditures x Capital expenditures ... View the full answer