Free Cash Flow Model Using your answers from Questions 3 through 5, value Lauryn

Question

Free Cash Flow Model Using your answers from Questions 3 through 5, value Lauryn's Doll Co. assuming her FCF is expected to grow at a rate of 3 percent into perpetuity. Is this value the value of the equity? Question 3 Free Cash Flow Model 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 1.4, a debt-to- equity ratio of.3, and a tax rate of 30 percent. Based on this information, what is Lauryn's asset beta? Question4 Free Cash Flow Model Using your answer to the previous question, calculate the appropriate discount rate assuming a risk-free rate of 4 percent and a market risk premium of 7 percent. Question 5 Free Cash Flow Model Lauryn's Doll Co. had EBIT last year of $40 million, which is net of a depreciation expense of $4 million. In addition, Lauryn made $5 million in capital expenditures and increased net working capital by $3 million. Using the information from Problem 3, what is Lauryn's FCF for the year?

Explanation / Answer

a) Asset Beta = Equity Beta / [1 + (1 - tax) x D/E] = 1.4 /[1 + (1 - 30%) x 0.3] = 1.157

b) Using CAPM, Cost of capital = Rf + beta x MRP = 4% + 1.157 x 7% = 12.10%

c) FCF = EBIT x (1 - tax) + Depreciation - Capex - NWC

= 40 x (1 - 30%) + 4 - 5 - 3 = 24 million

d) Value of firm = FCF x (1 + g) / (r - g) = 24 x 1.03 / (12.10% - 3%) = $271.6 million

Equity % = 1 - D/(D+E) = 1 - D/E / (1 + D/E) = 1 - 0.3 / (1 + 0.3) = 77%

Value of equity = Equity % x Value of firm = 77% x 271.6 = $209 million

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