Ibrahims Habanero Sauce Products management forecasts that if the firm sells each bottle of NitroStrength for $10,
Question:
Ibrahim’s Habanero Sauce Products management forecasts that if the firm sells each bottle of NitroStrength for $10, then the demand for the product will be 85,000 bottles per year. Management expects that if it sells NitroStrength for a price that is 10 percent higher, then it will sell 75 percent as many bottles of the sauce. Ibrahim’s variable cost per bottle is $4, and the total fixed cash cost for the year is $20,000. Depreciation and amortization charges are $3,000, and the firm has a 40 percent marginal tax rate. Management anticipates an increased working capital need of $2,000 for the year. What effect would the 10 percent price increase have on the firm’s FCF for the year?
Step by Step Answer:
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates