Witha risk-freerateof2%(in yen) thecost ofequity for
Toyota is 7.16%:
Beyondthefifthyear,weassumethattheexpectedgrowth
rateinnetincomewilldropto2%(setequaltotherisk-free
ratein yen) and thatthereturn onequitywill dropto the
stable-periodcost ofequityof 7.16%.Theresulting equity
reinvestment rate is 27.93%.
In thefollowingtable, we compute thefreecash flowsto
equityeach yearfor thenextfiveyearsassuming earnings
growthof10.66%andanequityreinvestmentrateof64.40%.
Wealsocalculatethepresentvalueofthecashflowsusing
thecostofequityof7.16%asthediscountrate(cashflowsin
billions of yen):