Sunmask is a cosmetics firm that has seen its stock price fall and its earnings decline in the past year. You have been hired as the new CEO of the company, and a careful analysis of Sunmask’s current financials reveals the following:

The firm currently has after-tax operating earnings of \($300\) million on revenues of \($10\) billion, and a capital turnover ratio

(sales–book value of capital) of 2.5.

The firm is expected to reinvest 60% of its after-tax operating income.

The firm is all equity financed and has a cost of capital of 10%.

a. Estimate the value of the firm, assuming existing policies continue forever. (Returns on capital and reinvestment rates remain constant forever as well.)

b. Assume that you can increase operating margins from 3% to 5%

without affecting the capital turnover ratio, that you can lower the reinvestment rate to 40%, and that the cost of capital will become 9%

if you shift to your optimal debt ratio. How much would your firm value increase if you were able to make these changes?