Question

Lauryn’s Doll Co. had an EBIT last year of $65 million, which was net of a depreciation of $4.5 million. Lauryn also had $7.25 million in capital expenditure and increased net working capital by $2 million. Assume the FCF is expected to grow at a perpetual rate of 3% and the tax rate is 40%. If the relevant discount rate is 11%, what is the value of the firm?

Group of answer choices

$440.97 million

$238.75 million

$350.84 million

$521.45 million

Answer 1

The value of the firm is computed as shown below:

FCF is computed as follows:

= EBIT (1 - tax rate) + depreciation - capital expenditure - increased working capital

= $ 65 million (1 - 0.40) + $ 4.5 million - $ 7.25 million - $ 2 million

= $ 34.25 million

So, the value will be computed as follows:

= FCF (1 + growth rate) / ( discount rate - growth rate)

= $ 34.25 million (1 + 0.03) / ( 0.11 - 0.03)

= $ 35.2775 million / 0.08

= $ 440.97 million Approximately