Sunmask is a cosmetics firm that has seen its stock price fall, and its earnings decline in the last year. You have been hired as the new CEO of the...
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Sunmask is a cosmetics firm that has seen its stock price fall, and

its earnings decline in the last year. You have been hired as the new CEO of the company and a careful analysis of Sunmask's current financials reveals the following: 


·       The firm currently has after-tax operating earnings of 300 million dollar on revenues of 10 billion dollar, and a capital turnover ratio (sales/book value of capital) of 2.5, 
·       The firm is expected to reinvest 60% of its after-tax operating income, 
·       The firm is all equity financed and has a cost of capital of 10%.


a. Estimate the value of the firm, assuming existing policies continue forever. (Returns on capital and reinvestment rates remain constant forever, as well) Mark the correct answer.


b. Assume that you can increase after-tax operating margins from 3 to 5% without affecting the capital turnover ratio, that you can lower the reinvestment rate to 40%, and that the cost of capital will become 9%, if you shift to your optimal debt ratio. How much would your firm value increase if you were able to make these changes? Mark the correct answer.

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