Q1. During the coming year, Gold & Gold wants to increase its free cash flow (FCF) by $210 million, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year:

• EBIT is projected to equal $850 million.
• Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
• The tax rate is 40%.
• There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.

What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Q2. Development Partners Housing has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4.0 percent. A rapid increase in interest rates has driven the interest rate up to 7.5 percent. What is the appropriate average cash balance now? Note that the fixed cost per transaction and the total cash needed for transactions during the year did not change.