Question
Happiness Inc is experiencing sales growth. You are hired to help them project their capital requirements for next year. What working capital increases and PP&E
Happiness Inc is experiencing sales growth. You are hired to help them project their capital requirements for next year. What working capital increases and PP&E investments should they be prepared for given the following.If you make any assumptions, please state them.
Current Year:
Revenue: $100 million
COGS: $65 million
Working Capital: $40 million
PP& E: $200 million
Next Year:
Sales Forecast Projects: $125 million in Revenue
COGS will remain the same as a % of sales, as will Asset Turn.
a) Given the answer to the prior question, what impact will maintaining the same efficiency ratios have on the firm as sales grow rapidly?
b) Given a WACC of 10% and a tax rate of 30%, what % increase in firm value did the sales jump create?
c) Given the investment in PP&E required and the capital requirements, do you think the firm will be able to maintain its current capital ratio? How will that impact the valuation from above?
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