Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

ToanalyzeToyotaina freecashflowtoequitymodel,we
summarizeourinputs forhigh growthand stablegrowthin
the following table:

High

Growth

Stable

Growth

Return on equity 16.55% 6.40%

Equity reinvestment rate 64.40% 31.25%

Expected growth 10.66% 2.00%

Beta 1.1 1.1

Costofequity(risk-freerate=2%;risk

premium = 4%)

6.40% 6.40%

Inhigh growth,thehighequityreinvestment rateandhigh
returnonequitycombinetogenerateanexpectedgrowthrate
of10.66%ayear.Instablegrowth,wereducethereturnon
equityforToyotatothecostofequity,assumingthatitwill
be difficult to sustain excess returns forperpetuity in this
business. Note also that the stable growth rate is low,
reflectingthefactthatthevaluationisinJapaneseyen(with
therisk-freerateof2%actingasthecapongrowth).Thebeta
for the firm is left unchanged at its existing level, since
Toyota’smanagementhasbeenfairlydisciplinedinstaying
focused on its core businesses.

Finally, letus considerTitan Cement. Thefollowingtable
reports on the return on capital, reinvestment rate, and
expectedgrowthforthefirminhigh-growth(nextfiveyears)
and stable-growth period (beyond year 5).