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's has a reported equity beta of 1.8, a debt-to-equity ratio of 0.3, and a tax rate of 30 percent. Assume a risk-free rate of 3 percent and a market risk premium of 9 percent. Lauryn’s Doll Co. had EBIT last year of $60 million, which is net of a depreciation expense of $6 million. In addition, Lauryn's made $5.55 million in capital expenditures and increased net working capital by $2.3 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm?

Explanation / Answer

Cost of equity= 0.03+(0.09-0.03)*1.8=0.138= 13.8%

FCF to the firm= EBIT x (1-tax) + Dep & Amort + Changes in Working Capital – Capital Expenditure

= 60*(1-0.3)+6+2.3-5.55

=42+2.75= 44.75

Terminal value= 44.75*(1+0.03)/0.138-0.03= 46.09/0.108= 426.75

Value of the firm=426.75million.

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