Question

76 Samsco has current after-tax operating income of $65 million and a cost of capital of...

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.

Homework Answers

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
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