Homework Answers
A)
Equity Reinvestment Rate = (Net Capital Expenditures + Change inWorking Capital) (1 - Debt Ratio)/ Net Income from non cash assets
As we know,
FCFE = Net Income + Depreciation & Amortization + Changes in Working Capital – Capital Expenditures + Net Debt Issued
Equity Reinvestment Rate = [(100 M - 80 M) (1 - 20%)] / 100 M = 16%
B)
Expected GrowthNet Income = Equity Reinvestment Rate * Non cash ROE
Non cash ROE = Net Income from non cash assets/ (BV of Equity – Cash)
Non cash ROE = 100 M / (800 M - 50M) = 0.133
Expected Growth Net Income = 16% * 0.133 = 2.133%
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