Question

You have been tasked with using the FCF model to value Julie’s Jewelry Co. After your initial review, you find that Julie’s has a reported equity beta of 1.5, a debt-to-equity ratio of .5, and a tax rate of 21 percent. In addition, market conditions suggest a risk-free rate of 4 percent and a market risk premium of 11 percent. If Julie’s had FCF last year of $47.0 million and has current debt outstanding of $119 million, find the value of Julie’s equity assuming a 3.1 percent growth rate in FCF. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Value of Equity = ?

Answer 1

Equity beta = 1.50

Rf = Risk free rate = 4%

Market risk premium = 11%

re = Cost of equity = Rf + beta * (market risk premium)

= 4% * (1.50 * 11%)

= 4% + 16.5%

= 20.5%

Current FCF = $47 million

g = growth rate = 3.1%

Expected FCF = Current FCF * (1+g) = $47 million * (1+3.1%) = $48.457 million

Value of Company = Expected FCF / (re - g)

= $48.457 million / (20.5% - 3.1%)

= $278.488506 million

Value of Equity = Value of company - Value of debt

= $278.488506 million - $119 million

= $159.488506 million

Therefore, Value of Equity is $159.49 million