Answer:
Net Income = $195 million
Depreciation Expense = $20 million
Decrease in Accounts receivable = $20 million
Decrease in accounts payable = $10 million,
Increase in inventories = $10 million
Increase in Net debt = $3 million
Increase/Decrease in working capital = Increase in inventory + Decrease in Account payable - Decrease in Account Receivables
= $10 milliion + $10 million - $20 million
= $0 million
Free Cashflow for equity calculation
Net Income $195 million
Add: Depreciation $20 million
Less: Capital expenditure ($0 million)
Less: Increase in working capital ($0 million)
Add: Increase in Net debt $3 million
Free Cash flow for Equity (FCFE) $218 million
Given FCFE growth rate (g) = 3%
Cost if equity (RE) = 11%
Market value of equity (VE) = FCFE / Re - g
Market value of equity = 218 million / 0.11 - 0.03
Market value of equity = 218 million / 0.08
Market value of equity = $2,725 million