You are going to value Lauryn’s Doll Co. using the FCF model. After consulting v
ID: 2771582 • Letter: Y
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 1.4, a debt-to-equity ratio of .6, and a tax rate of 40 percent. Assume a risk-free rate of 4 percent and a market risk premium of 10 percent. Lauryn’s Doll Co. had EBIT last year of $43 million, which is net of a depreciation expense of $4.3 million. In addition, Lauryn made $7 million in capital expenditures and increased net working capital by $4.0 million. Assume her FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)
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 .6, and a tax rate of 40 percent. Assume a risk-free rate of 4 percent and a market risk premium of 10 percent. Lauryn’s Doll Co. had EBIT last year of $43 million, which is net of a depreciation expense of $4.3 million. In addition, Lauryn made $7 million in capital expenditures and increased net working capital by $4.0 million. Assume her FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Free Cash flow to the firm = EBIT*(1-Tax Rate) + Depreciation - Increase in Working Capital - Capital Expenditure
= 43000000*(1-40%)+4300000-4000000-7000000 = 19100000
Terminal Value = Free Cash Flow*(1+Growth Rate)/Weighted Average Cost of Equity-Growth rate
= 19100000*(1+4%)/7.2% - 4% = 620750000
Firm Value = Free Cash flow to the firm + Terminal Value
= 19100000 + 620750000 = 639850000 or 639.85 Million
Beta 1.4 Debt Equity Ratio 0.6 Tax Rate 40% Risk Free rate 4% Market Risk Premium 10% EBIT 43,000,000 Depreciation 4,300,000 Capital Expenditure 7,000,000 Increased Net Working Capital 4,000,000 Growth rate 4% Cost of Equity = Risk Free Rate + Beta*Market Risk Premium 18% Weighted Average Cost of Equity = Cost of Equity*(1- Debt Equity ratio) 7.20%Related Questions
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