Question

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 1.4, a debt-to-equity ratio of .5, and a tax rate of 30 percent. Assume a risk-free rate of 4 percent and a market risk premium of 9 percent. Lauryn’s Doll Co. had EBIT last year of $42 million, which is net of a depreciation expense of $4.2 million. In addition, Lauryn made $6 million in capital expenditures and increased net working capital by $1.0 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places

Answer 1

Basset = Equity Beta/( 1 +(Debt/Equity)(1-tax rate))

=1.4 / (1 +0.5*(1-0.3)) = 1.037

Discount rate = Rf + Basset * Market risk premium

=4 + 1.037 * 9

=13.333%

FCF = EBIT -Taxes + Depreciation - Capex - Increase in net working capital

= $42 - $12.6 + $4. - $6 -$1 = $26.6 million

Value of the firm = FCF *(1 +g) / (Discount rate - g) = $26.6 million * (1+0.03)/ (0.13333 - 0.03)

= $265.1504 millions Answer

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