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 1.7, a debt-to-equity ratio of .6, and a tax rate of 30 percent. Assume a risk-free rate of 3 percent and a market risk premium of 7 percent. Lauryn’s Doll Co. had EBIT last year of $58 million, which is net of a depreciation expense of $5.8 million. In addition, Lauryn made $6.3 million in capital expenditures and increased net working capital by $2.5 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm?

Explanation / Answer

Rate of discount will be calulated using the CAPM model-

Rm = Rf + B(Rm-Rf)

Rm= 3 + 7*1.7= 14.9

FCFF = NI + NCC + [Int x (1-tax rate)] – FCInv – WCInv

Where:
NI = Net Income
NCC = Non-cash Charges (depreciation and amortization)
Int = Interest Expense
FCInv = Fixed Capital Investment (total capital expenditures)
WCInv = Working Capital Investments

FCFF= 58mn + 5.8mn -6.3mn -2.5mn = 52.5

So the value of the firm will be = FCFF/r-g

= 52.5 / 14.9-3

=441.18mn

Debt to equity ration given in the question will be ignored since that is used when FCFE is to be worked out.

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