You are going to value Lauryn’s Doll Co. using the FCF model. After consulting v

Question

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 1.6, a debt-to-equity ratio of .3, and a tax rate of 30 percent. Assume a risk-free rate of 5 percent and a market risk premium of 11 percent. Lauryn’s Doll Co. had EBIT last year of $50 million, which is net of a depreciation expense of $5 million. In addition, Lauryn made $6.5 million in capital expenditures and increased net working capital by $3.4 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)

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Explanation / Answer

COST OF EQUITY Ke

= Rf+ BEAT * MARKET RISK PREMIUM

= 5% + 1.6 * 11%

= 5% + 17.6%

= 22.6%

CALCULATION OF FUTURE CASH FLOW

VALUE OF FIRM

= CASH FLOW OF NEXT YEAR / (Ke - GROWTH)

= $30.1 * 103% / (22.6% - 3%)

= $31 / 19.6%

= $158.16

DETAILS AMOUNT EBIT $50 LESS TAX ($15) PROFIT AFTER TAX $35 ADD DEPERICATION $5 LESS CAPITAL EXPENDITURE ($6.5) LESS INCEREASE IN NET WORKING CAPITAL ($3.4) FUCTURE CASH FLOW $30.1

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