13) Net Income $60,000

+ Depreciation +6,000

- Capital Expenditures -7,000

- Increases in Working Capital -2,000

= Free Cash Flow 57,000

The above financial information for the ABC company is presented in thousands. ABC company is expecting annual growth of 5 per cent in its increase in working capital and net income. Lets assume that the ABC company manages to bring down the increase in working capital by ten per cent. Also, assume that this reduction does not adversely affect the other areas of the business. How does this reduction in increase in working capital affect the value of the ABC company? Assume that the cost of capital of the company is 13 per cent.

an increase of $1,370,000

an increase of $3,800,000

an increase of $500,000

an increase of $2,500,000