Computer Associates makes software that enables computers to run more efficiently. It is still in its high-growth phase and has the following financial characteristics:

Return on Assets = 25%

Dividend Payout Ratio = 7%

Debt/Equity Ratio = 10%

Interest rate on Debt = 8.5%

Corporate tax rate = 40%

It is expected to become a stable firm in ten years.

A. What is the expected growth rate for the high-growth phase?

B. Would you expect the financial characteristics of the firm to change once it reaches a steady state? What form do you expect the change to take?

C. Assume now that the industry averages for larger, more stable firms in the industry are as follows:

Industry Average Return on Assets = 14%

Industry Average Debt/Equity Ratio = 40%

Industry Average Interest Rate on Debt = 7%

Industry Average Dividend Payout ratio = 50%

What would you expect the growth rate in the stable growth phase to be?