Ecolab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of $2.35 in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998 and 6% a year after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993.Both were expected to grow at the same rate as earnings from 1994 to 1998. Working capital was expected to remain at 5% of revenues, and revenues, which were $1 billion in 1993, were expected to increase 6% a year from 1994 to 1998, and 4% a year after that.

The firm had has a debt ratio [D/(D + E)] of 5%, but planned to finance future investment needs (including working capital investments) using a debt ratio of 20%. The stock was expected to have a beta of 1 for the period of the analysis, and the Treasury bond rate was 6.50%. (There were 63 million shares outstanding, and the market risk premium was 5.5%.)

a. Assuming that capital expenditures and depreciation offset each other after 1998, estimate the value per share. Is this a realistic estimate?

b. Assuming that capital expenditures continue to be 200% of depreciation even after 1998, estimate the value per share.

c. What would the value per share have been, if the firm had continued to finance new investments with its old financing mix (5%)? Is it fair to use the same beta for this analysis?