Assume that the firm is in stable growth growing 5 percent, Accounting Basics

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Assume that the firm is in stable growth growing 5 percent

Vernon Enterprises has current after-tax operating income of $100 million and a cost of capital of 10 percent. The firm earns a return on capital equal to its cost of capital.

a. Assume that the firm is in stable growth, growing 5 percent a year forever; estimate the firm's reinvestment rate.

b. Given this reinvestment rate, estimate the value of the firm.

c. What is the value of the firm, if you assume a zero reinvestment rate and no growth?

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