Your firm currently has net working capital of ​$ that it expects to grow at a rate of ​% per year forever. You are considering some suggestions that could slow that growth to ​% per year. If your discount rate is ​%, how would these changes impact the value of your​ firm?

Complete Question:

Your firm currently has net working capital of $132,000 that it expects to grow at a rate of 4% per year forever. You are considering some suggestions that could slow that growth to 2% per year. If your discount rate is 10%, how would these changes impact the value of your firm? The value of the firm would $ (Round to the nearest dollar.)

The Firm

a. The changes will reduce the value of the firm from $2,200,000 to $1,650,000, a difference of $550,000.

b. The value of the firm would be $1,650,000 if the changes are retained.

Explanation:

a) Data and Calculations:

Current net working capital = $132,000

Expected growth rate = 4%

Desired growth rate = 2%

Firm's discount rate = 10%

Value of firm with expected growth rate of 4% = NWC/(k - g)

where NWC = Net Working Capital

k = discount rate

g = growth rate

Therefore value of the firm = $132,000/(0.1 - 0.04)

= $132,000/0.06

= $2,200,000

Value of the firm with reduced growth rate of 2%:

= $132,000/(0.1 - 0.02)

= $132,000/0.08

= $1,650,000

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