assume that non cash working capital remains at the existing percent of revenues est 546383
Furniture Depot is a retail chain selling furniture and appliances. The firm has after-tax operating income of $250 million in the current year on revenues of $5 billion. The firm also has 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.
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assume that non cash working capital remains at the existing percent of revenues est 546383
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b. Assume now that the firm is able to reduce its non-cash working capital requirement by 50%. Estimate the effect on 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?
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