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'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)?

Homework Answers

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 + Betaasset * 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

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