ToanalyzeToyotaina freecashflowtoequitymodel,we
summarizeourinputs forhigh growthand stablegrowthin
the following table:
High
Growth
Stable
Growth
Return on equity 16.55% 6.40%
Equity reinvestment rate 64.40% 31.25%
Expected growth 10.66% 2.00%
Beta 1.1 1.1
Costofequity(risk-freerate=2%;risk
premium = 4%)
6.40% 6.40%
Inhigh growth,thehighequityreinvestment rateandhigh
returnonequitycombinetogenerateanexpectedgrowthrate
of10.66%ayear.Instablegrowth,wereducethereturnon
equityforToyotatothecostofequity,assumingthatitwill
be difficult to sustain excess returns forperpetuity in this
business. Note also that the stable growth rate is low,
reflectingthefactthatthevaluationisinJapaneseyen(with
therisk-freerateof2%actingasthecapongrowth).Thebeta
for the firm is left unchanged at its existing level, since
Toyota’smanagementhasbeenfairlydisciplinedinstaying
focused on its core businesses.
Finally, letus considerTitan Cement. Thefollowingtable
reports on the return on capital, reinvestment rate, and
expectedgrowthforthefirminhigh-growth(nextfiveyears)
and stable-growth period (beyond year 5).