Vernon Enterprises has current aftertax 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. Assume that the firm is instable 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?