You are going to value Lauryn’s Doll Co. using the FCF model. After consulting v
ID: 2772110 • 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 1.6, 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.)
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
Value of firm= FCF/ (WACC- growth rate) To find WACC Cost of equity=Risk-free rate+(Market risk premium*Equity beta) ie. 0.06+(0.07*1.6) 0.172 17.20% Debt/Equity= 0.5 So, Debt=0.5 Cost of debt=0.5(1-0.3)= 0.35 35% Components of capital Weights Cost of component Wt,*Cost Equity 0.5 0.172 0.086 Debt 0.5 0.35 0.175 0.261 So,WACC 26.1 FCF= (52*(1-0.30))+5.2-5.75-3.2 32.65 Value of firm = FCF/(WACC-Growth rate) = 32.65 /(0.261-0.03) =$ 141.34 Million
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