Question
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
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. (4 points)
b. Given your valuation in part a, how under or over valued is the stock today. (2 points)
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