You are going to value Lauryn\'s Doll Co. using the FCF model. After consulting

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 1.7, a debt-to-equity ratio of 0.4, and a tax rate of 30 percent. Assume a risk-free rate of 6 percent and a market risk premium of 11 percent. Lauryn's Doll Co. had EBIT last year of $56 million, which is net of a depreciation expense of $5.6 million. In addition, Lauryn's made $5.3 million in capital expenditures and increased net working capital by $2.7 million. Assume the 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.) Firm value million

Explanation / Answer

Beta equity = beta asset ( 1 + Debt to equity ratio (1 - T))

T = tax rate = 30% = 0.3

Debt to equity ratio = 0.4

beta equity = 1.7

substitute in the formula

1.7 = beta asset (1 + 0.4(1-0.3))

beta asset = 1.33

rate of return = k

k = rf + beta asset * (market risk premium)

= 6% + 11%(1.33)

= 20.6 %

now find the free cash flow,

FCF = EBIT ( 1-T)+depreciation expenses - capital expenditures - net working capital

= 56(1-0.3) +5.6 - 5.3 - 2.7 = 36.80 million

growth rate = 3% = 0.03

k as we found previously = 20.6% = 0.206

Firm value = [ FCF for current year * (1+ growth rate ) ] / (k - g)

= [36.8 * (1+0.03)] / (0.206 -0.03) = $ 215.25 Million

Firm value = $ 215.25 Million

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