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3 years ago

5

Company A estimates that it needs 30% of sales in net working capital. In year 1, sales were $1 million and in year 2, sales wer

e $2 million. Associated with the change in net working capital from year 1 to year 2 is a cash:(A) inflow of $300,000.(B) outflow of $300,000.(C) inflow of $600,000.(D) outflow of $600,000.

1 answer:

Verizon [17]3 years ago

5 0

Answer:

(B) outflow of $300,000

Explanation:

The change in net working capital of the Company A shall be determined through the following mentioned equation:

Change in net working capital=Percentage of sales in year 2-Percentage of sales in year 1

Change in net working capital=0.30*$2,000,000-0.30*$1,000,000

=$300,000 out flow

So based on the above calculations, the answer shall be (B) outflow of $300,000

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From the given information:

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$\text{Value of stock today} =\bigg( \sum \limits ^{\text{no of years}}_{year =1} \dfrac{Dividend (D_o) \times 1 +Growth rate ) ^{\text{no of years}}}{(1+ interest rate )^{no\ of\ years} }$

$+ \dfrac{Terminal\ Value }{(1+interest \ rate )^{no \ of \ years}} \Bigg)$

$\implies \bigg(\dfrac{\$0.50\times (1 + 12\%)^1) }{(1+ 8\%)^{1} }+ \dfrac{\$0.50\times (1+12\%)^2 }{(1+8\% )^{2}}+ \dfrac{\$0.50\times (1+12\%)^3 }{(1+8\% )^{3}} + \dfrac{\$0.50\times (1+12\%)^4 }{(1+8\% )^{4}} + \dfrac{\$0.50\times (1+12\%)^5 }{(1+8\% )^{5}} + \dfrac{\$75.526}{(1+8\% )^{5}} \bigg )$

$\implies \bigg(\dfrac{\$0.5600}{1.0800}+\dfrac{\$0.62720}{1.16640}+\dfrac{\$0.70246}{1.2597}+\dfrac{\$0.78676}{1.3605}+\dfrac{\$0.88117}{1.4693}+ \dfrac{\$75.526}{1.4693} \bigg)$

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$\implies \bigg (\dfrac{\$0.5600}{1.0800}+\dfrac{\$0.62720}{1.16640}+\dfrac{\$0.70246}{1.2597}+\dfrac{\$0.78676}{1.3605}+\dfrac{\$0.88117}{1.4693}+ \dfrac{\$53.8773}{1.4693} \bigg)$

=$39.460

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Notice that the third question depicts the situation after 5 years, but the final decision will be the same since we are discounting in current terms. If compounding is used, the future value over 5 years is just the same as the first choice, which is the better option.

The presumption in the second portion is that after 5 years, the steady growth rate would be the same as measured in the first part (1).

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