MarienBurger SE is a firm with a target leverage ratio of 0.5 (i.e., D/E ratio = 0.5), and its

current cost of debt is 4%. The firm expects to have earnings before interest and taxes (EBIT)

this coming year of 100 million. The corporate tax rate is 25%. MarienBurger plans to retain

and reinvest 50% of its earnings for the next 3 years. Afterwards, the firm expect to be in the

steady growth phase, and therefore will retain and reinvest 30% of its earnings every year.

Each year retained earnings will be invested in new projects with an expected return on capital

employed of 11% per year. Assume that all earnings growth comes from the investment of

retained earnings.

a) If the firm's cost of equity is 15%, what enterprise value would you estimate for

MarienBurger? (10 points)

b) What will be the effect on the enterprise value, if the firm does not change its retention

policy after period 3 (i.e., keep retaining and investing 50% of its earnings till the infinity)?

(5 points)