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**

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