You are going to value Lauryns Doll Co. using the FCF model. After consulting va
ID: 2649638 • Letter: Y
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 1.7, a debt-to-equity ratio of .5, and a tax rate of 40 percent. Assume a risk-free rate of 6 percent and a market risk premium of 12 percent. Lauryns Doll Co. had EBIT last year of $57 million, which is net of a depreciation expense of $5.7 million. In addition, Lauryn made $4.3 million in capital expenditures and increased net working capital by $2.6 million. Assume her FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)
Firm value $ million
Explanation / Answer
Free cash flow = EBIT (-Tax)+Depreciation -increase in net working capital -Capital expenditure
=57(1-.40) +5.70 -2.60-4.30
=34.20-1.20
= $ 33 million
Cost of equity :Risk free rate +Beta(market risk premium)
6+1.70(12)
=6+20.4
=26.40%
After tax cost of debt = assuming cost of debt to be 6% =6(1-.40)
=3.60%
WACC = 1.188+17.688 = 18.876%(approx18.88%)
weights :
Debt =weight of debt/Total weight
= .5/(1+.5) = .33
Equity = 1/(1+.5) =.67
Value of firm( =[Free cash flow (1+growth)] /[cost of equity -growth]
= [33(1+.02)]/[.1888-.02]
=33.66/.1688
= 199.41 million
cost(%) Weights weighted cost Debt 3.60 .33 1.188 equity 26.40 .67 17.688Related Questions
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