Franklin Industries Has a Current Net Working Capital of $2

question 70

Multiple Choice

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

• A) a decrease of $2.22 million
• B) an increase of $12,500
• C) an increase of $0.78 million
• D) an increase of $2.08 million

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Definitions:

Perfect Knowledge

A theoretical situation in which all participants in a market have complete and accurate information about past, present, and future conditions.

Short Run

A period in economics where at least one factor of production is fixed, leading to limited adjustments in production or operation.

Long Run

An economic phase where every production factor and cost can adjust completely to alterations, due to their variable nature.

Most Efficient Output

The level of production at which a firm or economy can produce goods at the lowest average cost, maximizing efficiency.