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:

Underlying Stock

The stock that must be delivered when a derivative contract, like an option or futures contract, is exercised.

Initial Cost

The initial expenditure involved in purchasing an asset or starting a project.

Exercise Price

The established price at which an option holder may execute the purchase (in a call option scenario) or sale (when dealing with a put option) of the related security or commodity.

European Call Option Delta

A measurement of the sensitivity of a European call option's price to a change in the price of the underlying asset.