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 1.5, a debt-to-equity ratio of 0.3, and a tax rate of 40 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's made $4.25 million in capital expenditures and increased net working capital by $4.1 million. Assume the FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm (in millions)?

Answer 1

FCF = (EBIT -Depreciation)* ( 1- Tax rate) + Depreciation - Capital expenditure - Working Capital investment = (45 -4.5 ) * ( 1 - 40%) + 4.5 - 4.25 -4.1 = 20.45

Beta Asset = Beta Equity /( 1 + (1-tax rate)*D/E) = 1.5/( 1 + ( 1-40%)* 0.3) = 1.2712
According To Capm WACC = Risk free rate + Beta_asset * Market Risk Premium = 4% + 1.2712 * 12% = 19.2544%

Value of The firm = FCFF * ( 1+growth)/(Return - Growth) = 20.45 * 1.02/(19.2544% - 2%) = 120.89 million

Best of Luck. God Bless