After year5, we assume that thebeta dropsto 1,
leading to a reduction in the cost of capital to 7.58%.- After year 5, we also assume that the expected
growthratedropsto4%andthatthereturnoncapital
declines to the cost of capital of 7.58%. The
stable-period reinvestment rate is then 52.74%:
Thefirststepintheanalysisisforecastingthefreecashflows
tothefirmforthehigh-growthperiod.Thefollowingtable
summarizes the expected cash flows for the high-growth
period.
Notethatthecashflowsduringthehigh-growthperiodare
discounted backatthe cost ofcapital of 7.91%. Theyare
negativebecausethefirm’sreinvestmentsexceeditsafter-tax
operatingincome,anditwillhavetoraiseexternalfinancing
inthesameproportionasthedebtratiousedinthecost of
capital(82%equityand18%debt)tofundthedifference.To
estimatetheterminalvalueattheendofyear5,weusethe