An investment banker says, “I don’t worry about detailed, long-term forecasts. Instead, I use the following approach when forecasting cash flows beyond three years: I assume that sales grow at the rate of inflation, capital expenditures are equal to depreciation, and that net profit margins and working capital to sales ratios stay constant.”

What pattern of return on equity is implied by these assumptions?

Do you think that his assumptions are reasonable? Explain.

Answer rating: 100% (QA)

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