Estimate the terminal value for the firm

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Reference no: EM131901303

Lamps Galore Inc. manufactures table lamps and earns an after-tax return on capital of 15% on its current capital invested (which is $100 million). You expect the firm to reinvest 80% of its after-tax operating income back into the business for the next four years and 30% thereafter (the stable growth period). The cost of capital for the firm is 9%.

A) Estimate the terminal value for the firm (at the end of the fourth year).

B) If you expect the after-tax return on capital to drop to 9% after the fourth year, what would your estimate of terminal value be?

Reference no: EM131901303

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