You want to estimate an expected growth rate in operating income for Zordon Corp. for the next five years. In the most recent year, the firm reported after-tax operating income of $100M on a book value of capital of $1B. The firm also had capital expenditures of $150M and depreciation of $80M during the year. The firm expects to maintain this reinvestment rate for the next five years, earn 15% on its new investments starting immediately, and to gradually improve its return on capital on existing assets to 15% over the next five years. a. Estimate the annual expected growth in operating income for the next five years. b. How much of the annual growth rate (estimated in part a) can be attributed to more efficient utilization of existing assets?

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The answers are:

a)18.95%

b)8.45%