Question
In: Finance
You have been tasked with using the FCF model to value Julie’s Jewelry Co. After your...
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 1.7, a debt-to-equity ratio of .5, and a tax rate of 21 percent. In addition, market conditions suggest a risk-free rate of 6 percent and a market risk premium of 11 percent. If Julie’s had FCF last year of $50.0 million and has current debt outstanding of $125 million, find the value of Julie’s equity assuming a 3.5 percent growth rate in FCF. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
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Expert Solution
Step 1 : Beta
Company's Beta = Equity Beta * [ 1 + Debt equity ratio * ( 1 - tax rate ) ]
= 1.70 * [ 1 + 0.50 * ( 1 - 0.21 ) ]
= 1.70 * [ 1 + 0.50 * 0.79 ]
= 1.70 * 1.395
= 2.3715
Step 2: Required return
Required return = Risk free rate + Market risk premium * Beta
= 6% + 11% * 2.3715
= 32.09%
Value of Firm = [ FCF0 * ( 1 + g ) / ( Re - g ) ]
= [ 50 million * ( 1 + 0.035 ) / ( 0.3209 - 0.035 ) ]
= 51.75 million / 0.2859
= 181 million
Value of equity = Value of firm - Value of debt
= 181 million - 125 million
= 56 million Answer
jeff jeffy answered 2 years agoRelated Solutions
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