You are going to value Lauryns Doll Co. using the FCF model. After consulting va

Question

You are going to value Lauryns Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.6, a debt-to-equity ratio of .6, and a tax rate of 40 percent. Assume a risk-free rate of 6 percent and a market risk premium of 8 percent. Lauryns Doll Co. had EBIT last year of $53 million, which is net of a depreciation expense of $5.3 million. In addition, Lauryn made $4.75 million in capital expenditures and increased net working capital by $3.1 million. Assume her FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)

You are going to value Lauryns Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.6, a debt-to-equity ratio of .6, and a tax rate of 40 percent. Assume a risk-free rate of 6 percent and a market risk premium of 8 percent. Lauryns Doll Co. had EBIT last year of $53 million, which is net of a depreciation expense of $5.3 million. In addition, Lauryn made $4.75 million in capital expenditures and increased net working capital by $3.1 million. Assume her FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Answer: OFCF = EBIT(1-T) + depreciation - CAPEX - D working capital - D any other assets

=53(1-.40)+5.3-4.75 -3.1

= 29.25

Calculation of required rate of return: Rf+beta (market risk premium)

= 6%+1.6(8%)

=18.8%

Value of firm= 29.25/(0.188-0.02)

=29.25/0.168

=174.11

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.