Question

You have been asked to value Ausbiz, a private company, using an excess earnings method, given the following information: Working capital balance = $365,000 Fair value of fixed assets = $725,000 Book value of fixed assets = $500,000 Normalized earnings of firm = $105,000 Required return on working capital = 7.0 percent Required return on fixed assets = 8.0 percent Required return on intangible assets = 12.0 percent Weighted average cost of capital = 10.0 percent Long-term growth rate of residual income = 6.0 percent

What is Ausbiz’s return on working capital?

		$22,000
		$23,500
		$25,500
		$27,000

Answer 1

Answer

Return on working capital = Working capital balance x Required return on working capital

                                          = $365,000 x 7%

                                          = $25,550

Therefore , option c is correct

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