Question

You have been tasked with using the FCF model to value Julie’s Jewelry Co. After your initial review, you find that Julie’s has a reported equity beta of 1.4, a debt-to-equity ratio of .5, and a tax rate of 21 percent. In addition, market conditions suggest a risk-free rate of 2 percent and a market risk premium of 10 percent. If Julie’s had FCF last year of $43.5 million and has current debt outstanding of $112 million, find the value of Julie’s equity assuming a 2.2 percent growth rate in FCF. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Value of the Equity:

Answer 1

Value of leavered beta

b_l = b_u (1 + (1 – t) D/E)

1.4 = B_{asset *(1+0.5(1-0.21))}

B_asset = 1.0035

Discount Rate = Risk Free Rate + (Beta x Market Risk Premium)

          Discount Rate = 2% + (1.0035 x 10%)

          Discount Rate = 12.035%

FCF last year FCF_{0 =} $43.5m

growth rate = 2.2%

FCF₁ = $43.5m* (1+0.022)= $44.457m

Value of firm =

=$ 452.028

Current debt outstanding = $112m

Value of equity = $452.028 - $112 = $340.03 milions