Toro Corporation, which manufactures lawn mowers and tractors, had revenues of ($635) million in 1992, on which
Question:
Toro Corporation, which manufactures lawn mowers and tractors, had revenues of \($635\) million in 1992, on which it reported a loss of \($7\) million (largely as a consequence of the recession). It had interest expenses of \($17\) million in 1992, and its bonds were rated BBB; a typical BBB-rated company had an interest coverage ratio
(EBIT/interest expenses) of 3.10. The company faced a 40% tax rate.
The stock had a beta of 1.10. (The Treasury bond rate was 7%, and the risk premium is 5.5%.)
Toro spent \($25\) million on capital expenditures in 1992, and had depreciation of \($20\) million. Working capital amounted to 25% of sales.
The company expected to maintain a debt ratio of 25%. In the long term, growth in revenues and profits was expected to be 4%, once earnings return to normal levels.
a. Assuming that the bond rating reflects normalized earnings, estimate the normalized earnings for Toro Corporation.
b. Allowing for the long-term growth rate on normalized earnings, estimate the value of equity for Toro Corporation.
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