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One analyst is trying to estimate the growth rate for Spirit Co. for the following 5 years, and he has obtained the following information in
One analyst is trying to estimate the growth rate for Spirit Co. for the following 5 years, and he has obtained the following information in the most recent financial year:
| EBIT | $200 million |
| Book value of capital | $1000 million |
| Capital expenditures | $150 million |
| Depreciation | $80 million |
| Change of non-cash working capital | $20 million |
The tax rate has been always fixed at 30%.
- Estimate the expected growth rate for the next 5 years given both ROC and reinvestment rate will be unchanged.
- If ROC on new investments will immediately jump to 25% and ROC on existing investments will gradually improve to 25% over the next 5 years, estimate the growth rate on new investments, growth rate on efficiency, and total growth rate.
- How would you deal with the temporarily and long-run negative reinvestment rates?
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