Question
Mike builders is a car services company that reported after-tax operating profits last year of $160 million on revenues of $ 1 billion. However, the
Mike builders is a car services company that reported after-tax operating profits last year of $160 million on revenues of $ 1 billion. However, the firm benefited from car prices (averaging $100/car) during the course of the year. Car prices have now dropped to $ 65/car and your assessment of Mike builders history suggests that every $ 1/car drop in the stock price costs them $1.25 million in after-tax operating profits. If the firm is in stable growth, with production growing 2% a year in perpetuity and the business is a competitive one (where firms earn their cost of capital of 7% over time), estimate the value of bob car today. Note, factor reinvestment needs in.
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