Question

76

Samsco has current after-tax operating income of $65 million and a cost of capital of 9.5%. Assume that the firm is in stable growth, growing 3% a year forever and that the reinvestment rate is 35%.

Using the calculation from the previous question, please compute the value of Samsco.

Answer 1

Answer
Given that -
Current year after tax operating income		$65.00	Million
Growth rate G =		3.00%
required rate R =		9.50%
Reinvestment rate =		35.00%
Value of firm can be computed using below formula
Value of firm = (Current year after tax operating income *(1+Growth%)*(1-reinvestment rate))/(Required rate of return-growth rate)
=(65*(1+0.03)*(1-0.35))/(0.095-0.03)		$ 669.50	million