risk-freerateof4.25%andariskpremiumof4%,the
resulting cost of capital for the firm is 7.39%.
- Wewillassumethattheaveragereinvestmentrateof
approximately 50% over the prior five years will
continue to hold in the future. This results in an
expectedgrowthrate of8.13% ayearfor thenext
five years: - After year 5, operating income and revenues are
expectedtogrow4.25%ayearforever,andthefirm
willearnno excess returns;theafter-taxreturn on
capitalwillbeequaltothecostofcapitalof7.39%.
Asa result,thereinvestmentrateafteryear 5 isas
follows:
Basedontheseinputs,thecashflowstoGilletteoverthenext
fiveyears and for theterminal value canbe calculated as
follows (dollar amounts in millions):