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 1.6, a debt-to-equity ratio of 0.3, and a tax rate of 30 percent. Assume a risk-free rate of 5 percent and a market risk premium of 11 percent. Lauryn’s Doll Co. had EBIT last year of $50 million, which is net of a depreciation expense of $5 million. In addition, Lauryn's made $6.5 million in capital expenditures and increased net working capital by $3.4 million. Assume the 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

WACC = wd x rd x (1 - tax) + we x re

where, wd - weight of debt = D/E / (1 + D/E) = 0.3 / 1.3 = 23%, rd - cost of debt = 5%, we - weight of equity = 1 - 23% = 77%, re - cost of equity = Rf + beta x MRP = 5% + 1.6 x 11% = 22.6%

=> WACC = 23% x 5% x (1 - 30%) + 77% x 22.6% = 18.19%

FCF = EBIT x (1 - tax) + Depreciation - Capex - NWC

= 50 x (1 - 30%) + 5 - 6.5 - 3.4

= $30.1 million

=> Value of the firm = FCF0 x (1 + g) / (WACC - g)

= 30.1 x (1 + 3%) / (18.19% - 3%)

= $204.07 million