Question

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources,...

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.5, a debt-to-equity ratio of .3, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 12 percent. Lauryn’s Doll Co. had EBIT last year of $45 million, which is net of a depreciation expense of $4.5 million. In addition, Lauryn made $4.25 million in capital expenditures and increased networking capital by $4.1 million. Assume her FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm?

Homework Answers

Answer #1

D/E ratio = 0.3. Thus weight of debt in capital = 0.3/(1+0.3) = 0.23077. Cost of debt = 4% (i.e. the risk free rate).

Weight of equity = 1-0.23077 = 0.769231. Cost of equity = risk free rate + beta*market risk premium = 4%+(1.5*12%) = 22%

We can now compute WACC and it will be = (4%*0.23077) + (22%*0.769231) = 17.846154%

FCF =( EBIT*(1-tax rate))+Depreciation - Capital expenditures - net working capital      

= (45*(1-0.21))+4.5-4.25-4.1

= 31.70

Thus value = FCF 0*(1+growth rate)/(wacc - growth) = 31.70*1.02/(17.846154%-2%)

= $204.05 million. Thus the value of the firm is $204.05 million

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