Assuming that the bond rating reflects normalized earnings

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Reference no: EM131919523

Toro Corporation, which manufactures lawn mowers and tractors, had revenues of $635 million in 1992, on which it reported a loss of $7 million (largely as a consequence of the recession). It had interest expenses of $17 million in 1992, and its bonds were rated BBB; a typical BBB-rated company had an interest cov- erage ratio (EBIT/interest expenses) of 3.10. The company faced a 40% tax rate. The stock had a beta of 1.10. (The Treasury bond rate was 7%, and the risk pre- mium is 5.5%.) Toro spent $25 million on capital expenditures in 1992, and had depreciation of $20 million. Working capital amounted to 25% of sales. The company expected to maintain a debt ratio of 25%.

In the long term, growth in revenues and profits was expected to be 4%, once earnings return to normal levels.

a. Assuming that the bond rating reflects normalized earnings, estimate the nor- malized earnings for Toro Corporation.

b. Allowing for the long-term growth rate on normalized earnings, estimate the value of equity for Toro Corporation.

Reference no: EM131919523

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