Question

Westfield has two divisions beta of .50, expects to generate f ree cash flow of $40 million this coming year, and anticipates a long-run growth rate of 1.5%. The toy division has an asset beta of .80, expects to generate free cash flow of $50 million this coming year, and expects a long-run growth rate of 2%. and the expected return on the market portfolio is 10%. the value of each division The food division has an asset The risk-free rate of return is 3% Estimate

Answer 1

food

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 3 + 0.5 * (10 - 3)

Expected return% = 6.5

firm or enterprise value = FCF in 1 year/(WACC - growth rate)

Firm/enterprise value = 40/ (0.065 - 0.015)

Firm/enterprise value = 800

Toy

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 3 + 0.8 * (10 - 3)

Expected return% = 8.6

firm or enterprise value = FCF in 1 year/(WACC - growth rate)

Firm/enterprise value = 50/ (0.086 - 0.02)

Firm/enterprise value = 757.58