assuming that the bond rating reflects normalized earnings estimate the normalized e 546331

Toro Corporation, which manufactures lawn mowers and tractors, had revenues of $635 million in 1992, on which it reported a loss of $7 million (largely as a consequence of the recession). It had interest expenses of $17 million in 1992 and its bonds were rated BBB. (A typical BBB rated company had an interest coverage ratio (EBIT/Interest Expenses) of 3.10.) The company faced a 40% tax rate. The stock had a beta of 1.10. (The treasury bond rate is 7%.) Toro spent $25 million on capital expenditures in 1992, and had depreciation of $20 million. Working capital amounted to 25% of sales. The company expects to maintain a debt ratio of 25%. In the long term, growth in revenues and profits is expected to be 4%, once earnings return to normal levels.

a. Assuming that the bond rating reflects normalized earnings, estimate the normalized earnings for Toro Corporation.

b. Allowing for the long term growth rate on normalized earnings, estimate the value of equity for Toro Corporation.