) The Fabulous Fashions Corporation has an operating profit of $25,000, a reinvestment rate of 10%,...

) The Fabulous Fashions Corporation has an operating profit of $25,000, a reinvestment rate of 10%, and a growth rate (g) of 3%. The owner said she will reduce her salary so that the reinvestment rate can increase to 20%. Using a 9% discount rate, calculate the value of Fabulous Fashions with the 10% investment rate and then a 20% reinvestment rate. Construct a table and compare the FCF’s, ROIC, RR, growth rate (g), and values. Use an Excel spreadsheet. Paste information here or attach file.

Value_{t =} FCF_t+1 / discount – growth rate

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Expert Solution

Below is the explanation how we have gone about this problem and excel screenshots of both the formulas used in excel sheet and the final results of excel file.

Since, we are not given with the ROIC number which would be crucial for our calculation, our first step would be to calculate that. For that, we have used the base case Growth of 3% and Reinvestment Rate of 10%.

ROIC =

Thus, using this ROIC and new reinvestment rate we have calculated new growth rate. That has been applied to calculate Operating profit in both the cases. From that, FCF has been calculated as follows:

FCF₁ = Operating Profit₁ * (1 - Reinvestment Rate)

Then, we have used the formula to calculate the value of firm.

jeff jeffy answered 1 year ago

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