Question

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.6, a debt-to-equity ratio of 0.4, and a tax rate of 40 percent. Assume a risk-free rate of 5 percent and a market risk premium of 12 percent. Lauryn’s Doll Co. had EBIT last year of $51 million, which is net of a depreciation expense of $5.1 million. In addition, Lauryn's made $7.5 million in capital expenditures and increased networking capital by $4.5 million. Assume the FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

Equity Beta = 1.6

Debt - Equity Ratio = 0.4

Tax Rate = 0.4

Asset Beta =

Asset Beta = 1.6 / (1 + 0.4 *(1-0.4))

Asset Beta = 1.29

Risk Free Rate (Rf) = 5%

Market Risk Premium = 12%

Cost of Assets = Rf + Market Risk Premium * Assets Beta

WACC = 5% + 12% * 1.29 = 20.48%

EBIT = 51 million

Depreciation = 5.1 million

Capital Expenditure = 7.5 million

Increase in Working Capital = 4.5 million

Free Cashflow to Firm (FCF) = EBIT * (1 - Tax Rate) - Capex + Depreciation - Net Increase in Working Capital

FCF = 51 * (1 - 0.4) - 7.5 + 5.1 - 4.5 = $23.7 million

Stable Growth Rate = 4%

Value of Firm =

Value of Firm = [23.7 * (1 + 4%)] / (20.48% - 4%) = $149.53 million