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 17, a debt-to-equity ratio of 0.5, and a tax rate of 40 percent. Assume a risk-free rate of 6 percent and a market risk premium of 12 percent. Lauryn's Doll Co. had EBIT last year of $57 million, which is net of a depreciation expense of $5.7 million. In addition, Lauryn's made $4.3 million in capital expenditures and increased net working capital by $2.6 million. Assume the FCF is expected to grow at a rate of 2 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.) Firm value

Answer 1

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Answer:

We know the fomula for FCF as

FCF = EBIT*(1-tax)+Depreciation-capex - NWC

=> FCF = $57*(1-0.40)+$5.7-$4.3 - 2.6

FCF = $33 million.

Equity beta Asset beta = {1+((1-Tax rate)x)

=> Beta = 1.7/(1+(1-0.4)*0.5) = 1.307

=> Discount Rate = Risk Free Rate + (Beta x Market Risk Premium) = 6 + 1.307 * 12 = 21.69%

Now, Firm Value = FCF (1+g) / (R-G)

=> Firm Value = 33 (1+0.02) / (0.2169 - 0.02)

Firm Value = $170.95 million