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A company expects capital expenditures and depreciation to continue to offset each other and for both...

A company expects capital expenditures and depreciation to continue to offset each other and for both net income and increases in working capital to grow at 6.32% per year. The firm cost of capital is 16.85%. If the firm was able to reduce its annual increase in working capital by 31.05%, what would be the effect on the firm's value? The firm Free Cash Flow and Working Capital for the year was 1.54M and 25.13M respectively.

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Answer #1

There would be a negative impact on the overall value of the firm as the increase in rate of working capital is lower than increase in rate of cost of capital of the firm.

when the cost of capital of the firm is higher than change in working capital of the company ,it means that there is not enough liquidity available to the firm in order to honour it's debt.

hence it will overall have a negative impact as the difference between the rate of growth between the two component would be reflected into the free cash flows of the firm.

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