theSUVsandminivansmadebyU.S.automanufacturers.To
value the company, we made the following assumptions:
Toyotareportednetincomeof1,171billionyenin2004,of
which 29.68 billion yen reflected aftertax interest income
fromcashholdings.Basedonthebookvalueofequityand
cash holdings at the beginning of 2004, we computed a
noncash return on equity of 16.55%:
In2004,Toyotareportedcapitalexpendituresof1,923billion
yen, depreciation of 998 billion yen, and a decrease in
noncashworkingcapitalof 50 billionyen.Thefirmincreased
itstotaldebtby 140 billionyenduringtheyear.Theresulting
equity reinvestment rate is 64.4%.
We will assume that Toyota will be able to maintain its
currentnoncashreturnonequityandequityreinvestmentrate
forthenextfiveyears,resultinginanexpectedgrowthratein
net income of 10.66%:
Toestimatethecostofequity,weassumethatToyota’sbeta
will be 1.1 in perpetuity. To estimate the market risk
premium, we breakdown Toyota’s sales by regionof the
world (using 2005 data) and estimate a composite risk
premium of 4.69%.