Question

You are trying to estimate the fundamental growth in earnings for Janus Enterprises for the next 5 years and have obtained the following information:

In the most recent year, Janus reported operating income of $100 million on book capital invested (at the beginning of the period) of $800 million. The firm faced a tax rate of 40% during the period. The firm also reported capital expenditures of $140 million and depreciation of $ 100 million in the most recent year. Non-cash working capital increased by $10 million during the year.

--Estimate the after-tax return on capital last year for Janus.

--Estimate the reinvestment rate last year for Janus.

--Estimate the expected growth rate for the next 5 years for Janus, assuming that the return on capital and reinvestment rate remain unchanged.

--Now assume that Janus will improve its return on capital on new investments for the next 5 years to 15% while the return on capital on existing investments will remain at current levels. Estimate the expected annual growth rate over the 5 years.

Answer 1

Solution)

Given Data:- Operating Income, EBIT=$100 mn

Investment=$800 mn

Tax Rate=40%

Capital expenditure=$140 mn

Depreciation=$ 100 mn

Non-Cash Working Capital= $10 mn

(a)

(b)

(c)

OR 30.8%

(d)

  [=>ROC is increased by 15%=> (given in question)]

OR 50.4%