- P&G had earnings before interest and taxes of
$10,927milliononrevenuesof$56,741million.The
tax rate for the firm is 35%. - The firm had total capital invested of $38,119
million, generating a pretax return on capital of
28.67% (10,927/38,119 = .2867). - Thefirmhadadebt-to-capitalratioof10%,abetaof
0.8, anda pretax cost ofdebtof 5%. Ifwe usea
risk-freerateof4.25%andariskpremiumof4%,the
resulting cost of capital for the firm is 7.03%. - Althoughthereinvestmentratehasvariedovertime,
wewillassumethattheaveragereinvestmentrateof
approximately 40% over the past five years will
continue to hold in the future. This results in an
expectedgrowthrate of7.45% ayearfor thenext
five years. - After year 5, operating income and revenues are
expectedtogrow4.25%ayearforever,andthefirm
willearnno excess returns;theafter-taxreturn on
capitalwillbeequaltothecostofcapitalof7.03%.
Asaresult,thereinvestmentrateafteryear 5 hasto
be recalculated:
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