Free Cash Flow Model Using your answers from Questions 3 through 5, value Lauryn

Question

Free Cash Flow Model Using your answers from Questions 3 through 5, value Lauryn's Dolil Co assuming her FCF is expected to grow at a rate of 3 percent into perpetuity. Is this value the value of the equity? Question 3 Free Cash Flow Model 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 .3, and a tax rate of 30 percent. Based on this information, what is Lauryn's asset beta? Question 4 Free Cash Flow Model Using your answer to the previous question, calculate the appropriate discount rate assuming a risk-free rate of 4 percent and a market risk premium of 7 percent. Question5 Free Cash Flow Model Lauryn's Doll Co. had EBIT last year of $40 million, which is net of a depreciation expense of $4 million. In addition, Lauryn made $5 million in capital expenditures and increased net working capital by $3 million. Using the information from Problem 3, what is Lauryn's FCF for the year?

Explanation / Answer

3. Asset Beta = Equity beta /[1+ {(1-tax rate)*(debt/equity)}]

= 1.4/[1+{(1-0.30)*0.3}]

= 1.4/1.21 = 1.157

4. According to CAPM,

Cost of equity = Rf + Beta(Market Risk Premium)

= 0.04 + 1.157(0.07) = 12.10%

5. FCF = EBIT * (1 - Tax Rate) + (Depreciation) + (Amortization) - (Change in Net Working Capital) - (Capital Expenditures)
= $40 million(1 - 0.30) + $4 million - $3 million - $5 million = $24 million

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