Calero Inc. is a publicly-traded firm, with 25 million shares trading at $16/share (book value of equity is $250 million), $300 million in debt outstanding (market and book value), and $50 million as a cash balance. The company generated $60 million in after-tax operating income last year and is expected to maintain its current return on capital in perpetuity. The cost of equity for the firm is 12% and the cost of capital is 10% in perpetuity.

a. Assuming that the company is expected to grow its operating income 9% a year for the next three years and 3% a year thereafter in perpetuity, estimate the value of the operating assets of the firm today.

b. Given your valuation in part a, how under or overvalued is the stock today.

Answer rating: 100% (QA)

a Operating Income 60 million Value of the operating as... View the full answer