High GrowthStable Growth
Return on capital 20.49% 6.57%
Reinvestment rate34.14% 51.93%
Expected growth 7.00% 3.41%
Beta 0.93 1.00
Cost of capital 6.78% 6.57%**Country risk premium goes to zero.
Thefirmhasahighreturnoncapitalcurrently,butwewill
assumethattheexcessreturnswilldisappearwhenthefirm
reachesitsstable-growthphase;thereturnoncapitalwilldrop
tothecostofcapitalof6.57%.Sincethestablegrowthrateis
3.41%,theresultingreinvestmentrateatTitan Cementwill
increaseto51.93%(3.41%/6.57%).Wewillalsoassumethat
the beta for Titan Cement will converge on the market
average.
Assumingthatexcess returnscontinue inperpetuity,as we
have for Goldman Sachs, is potentially troublesome.
However,thecompetitiveadvantages thatsomefirms have
built uphistorically or willbuildup over thehigh-growth
phasewillnotdisappearinaninstant.Theexcessreturnswill
fade over time, but moving them to or toward industry
averages in stable growth seems like a reasonable
compromise.
The Transition to Stable Growth
Onceyouhavedecidedthatafirmwillbeinstablegrowthat
apointintimeinthefuture,youhavetoconsiderhowthe
firmwillchangeas itapproachesstablegrowth. Thereare