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 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

Homework Answers

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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