Question
Crabbe Steel owns a number of steel plants in Pennsylvania. The firm reported an after-tax operating income of $50 million in the most recent year
Crabbe Steel owns a number of steel plants in Pennsylvania. The firm reported an after-tax operating income of $50 million in the most recent year on capital invested of $500 million. The firms cost of capital is 9% and you expect the firms current return on capital to continue in perpetuity. The firm expects operating income to grow 8% a year for the next 4 years.
Part 1
If you expect operating income to grow at 3% a year in perpetuity after year 4, estimate the terminal value at the end of year 4.
Part 2
If you expect operating income to stay fixed after year 4 (what you earn in year 4 is what you will earn every year thereafter), estimate the terminal value.
Part 3
If you expect operating income to grow at -6% a year in perpetuity after year 4, estimate the terminal value at the end of year 4.
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