Question
Ulysses Inc. is a shipping company with $100 million in earnings before interest and taxes that is expected to have earnings growth of 10% for
Ulysses Inc. is a shipping company with $100 million in earnings before interest
and taxes that is expected to have earnings growth of 10% for the next five
years. At the end of the fifth year, you estimate the terminal value using a multi-
ple of 8 times operating income (which is the average for the sector).
a. Estimate the terminal value of the firm.
b. If the cost of capital for Ulysses is 10%, the tax rate is 40%, and you expect
the stable growth rate to be 5%, what is the return on capital that you are as-
suming in perpetuity if you use a multiple of 8 times operating income?
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