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Your manager asked you to estimate an expected growth rate in operating income for the next 5 years for Gleeba Inc, a retail company. During the recently completed financial year, Gleeba reported an after-tax operating income of $150 million on a book value of capital of $1 billion. The firm's capital expenditures for that year were $200 million and the depreciation amounted to $75 million. Assume the change in non-cash working capital is zero. You expect Gleeba to maintain this reinvestment rate for the next 5 years. You also anticipate that the company will earn a return on capital of 20% on its new investments and that its return on capital on its existing projects will improve gradually to 20% over the next 5 years. a) Estimate the expected annual growth rate in operating income for the next 5 years for Gleeba Inc. b) How much of this annual growth rate comes from the improved efficiency of current projects? Your manager asked you to estimate an expected growth rate in operating income for the next 5 years for Gleeba Inc, a retail company. During the recently completed financial year, Gleeba reported an after-tax operating income of $150 million on a book value of capital of $1 billion. The firm's capital expenditures for that year were $200 million and the depreciation amounted to $75 million. Assume the change in non-cash working capital is zero. You expect Gleeba to maintain this reinvestment rate for the next 5 years. You also anticipate that the company will earn a return on capital of 20% on its new investments and that its return on capital on its existing projects will improve gradually to 20% over the next 5 years. a) Estimate the expected annual growth rate in operating income for the next 5 years for Gleeba Inc. b) How much of this annual growth rate comes from the improved efficiency of current projects?
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