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 .5, and a tax rate of 30 percent. Assume a risk-free rate of 6 percent and a market risk premium of 7 percent. Lauryn’s Doll Co. had EBIT last year of $52 million, which is net of a depreciation expense of $5.2 million. In addition, Lauryn made $5.75 million in capital expenditures and increased net working capital by $3.2 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Answer:

calculation of asset Beta:

Equity beta = 1.6 = Beta Asset * (1+D/E(1-t) => 1.6 = Beta Asset * {1+0.5(1-0.3)} => Beta Asset = 1.6/1.35 = 1.185

So the required rate of return = Risk free rate + Beta Asset* Risk premium

= 6%+1.185*7% = 14.295%

FCFFirm = EBIT(1-tax) + Depreciation - capital investment - Working capital investment

= $52 million(1-0.3) + $5.2 million - $5.75 million - $3.2 million = $32.65 million

Next year expected FCFF = $32.65(1+0.03) = $33.6295 million

The value of the firm = Next year expected FCFF/(Required rate of return - Growth rate)

= $33.6295/(0.14295 - 0.03) = $297.74 million (ans)

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