Basedontheseinputs,thecashflowstoP&Goverthenext
fiveyearsandfortheterminalvaluecanbecalculated(dollar
amounts in millions):
Theterminalvalueisestimatedusingthecashflowsinthe
terminalyear,thecostofcapitalinperpetuity(7.03%),and
the expected growth rate of 4.25%:
Discountingtheexpectedfreecash flowsfor thenextfive
yearsandtheterminalvaluebacktothepresentyieldsavalue
for P&G of $128,985 million.
To value Gillette as a stand-alone firm, we made similar
assumptionsaboutcash flows,growth,andreinvestment.In
particular, we assumed that:
- Gillette had earnings before interest and taxes of
$2,645milliononrevenuesof$10,477million.The
tax rate for the firm is 35%. - ThecapitalinvestedatGillettehasbeenvolatile,but
wewillassumethatGillettecanearnapretaxreturn
on capital of 25% on its new investments. - Thefirmhadadebt-to-capitalratioof10%,abetaof
0.9, anda pretax cost ofdebtof 5%. Ifwe usea