Allen Brothers Is Interested in Increasing Its Free Cash Flow

question 106

Multiple Choice

Allen Brothers is interested in increasing its free cash flow (which it hopes will result in a higher EVA and stock price) • EBIT is projected to be $850 million. • Gross capital expenditures are expected to total $360 million, and its depreciation expense is expected to be $120 million. Thus, its net capital expenditures are expected to total $240 million.
• The firm's tax rate is 40 percent.
The company forecasts that there will be no change in its cash and marketable securities, nor will there be any changes in notes payable or accruals. Which of the following will enable the company to achieve its goal of generating $180 million in free cash flow?

• A) Accounts receivable increase by $500 million, inventory increases by $100 million, and accounts payable decline by $480 million.
• B) Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $790 million.
• C) Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $610 million.
• D) Accounts receivable decrease by $500 million, inventory increases by $480 million, and accounts payable decline by $80 million.
• E) Accounts receivable decrease by $400 million, inventory increases by $480 million, and accounts payable increase by $80 million.

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Definitions:

Risk Averse

A characteristic of preferring to avoid risk, inclining towards guaranteed outcomes over potentially higher-yielding but uncertain ones.

Income

The accumulation of funds, characteristically on a habitual basis, through work or investing.

Von Neumann-Morgenstern

A theory of expected utility that describes how rational individuals choose among uncertain prospects, emphasizing the maximization of utility for decision-making under uncertainty.

Utility Function

A mathematical representation in economics that portrays an individual's preference ranking for different bundles of goods or outcomes.