sales-to-capital ratio for the firm and the average
sales-to-capital ratio for its peer group.
Weuseasales-to-capitalratioof1.50forSirius,reflectingthe
industry average. Based on this estimate, we can now
calculatehowmuchSiriuswillhavetoreinvesteachyearfor
the next 10 years:
Toexaminewhethertheassumptionsaboutreinvestmentare
reasonable,wekeeptrackofthecapitalinvestedinthefirm
each year by adding the reinvestment in that year to the
capital invested in the prior year. Dividing the estimated
after-tax operating income from Illustration 4.11 by the
capital invested (at the end of the prior year) yields an
imputedreturnoncapitalforthefirmeachyear.Thereturnon
capitalatSiriusconvergesontheindustryaverageof12%by
the terminal year. This suggests that our estimates of
sales-to-capital ratios are reasonable.
TERMINAL VALUE