Question: Vernon Enterprises has current after-tax operating income of $ 100 million and a cost of capital of 10%. The firm earns a return on capital equal to its cost of capital.
a. If we assume that the firm is in stable growth, growing 5% 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?