Toestimatethereinvestmentneedsforthefirm,weusedthe
sales-to-capital ratio of 1.5 (approximately the industry
average)andthechangeinrevenueseachyear.Thefollowing
table reproduces our estimates:
To estimate thecost of capital for thefirm,we began by
assumingabetaof1.8forthefirstfiveyearsandapretaxcost
of debt of 7.5%, reflecting its status as a young, risky
company.Inthetransitionperiod,wereducedthebetatoward
itsstablegrowthlevelof 1 andthepretaxcostofborrowingto
5%.Inaddition,thefirmgetsnotaxbenefitsfrominterest
expensesuntiltheninthyear,becauseofoperatinglossesin
the first four years and net operating loss carryforwards
beyond that (see Chapter 4 for details). The debt ratio