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 1.6, a debt-to-equity ratio of .6, and a tax rate of 21 percent. Assume a risk-free rate of 6 percent and a market risk premium of 8 percent. Lauryn’s Doll Co. had EBIT last year of $53 million, which is net of a depreciation expense of $5.3 million. In addition, Lauryn's made $4.75 million in capital expenditures and increased net working capital by $3.1 million. Assume the FCF is expected to grow at a rate of 2 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.)

Answer 1

We can calculate the value of firm as follows:

Firstly we need to calculate the Free cash flows which are:

= EBIT * ( 1 - Tax rate) + Depreciation - Capital Expenditure - Net Working Capital

= 53 * ( 1 - 21%) + 5.30 - 4.75 - 3.10

= (53 * 0.79) + 5.30 - 4.75 - 3.10

= 41.87 + 5.30 - 4.75 - 3.10

= $ 39.32 Million

Now we will calculate Assets Beta as:

Equity Beta = Assets Beta * ( 1 + (debt equity ratio * ( 1 - Tax rate ) ) )

Assets Beta = Equity Beta / ( 1 + (debt equity ratio * ( 1 - Tax rate ) ) )

= 1.60 / ( 1 + (0.60 * ( 1 - 21%) ) )

= 1.60 / 1.474

= 1.08548

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

= 6% + ( 1.08548 * 8% )

= 6% + 8.6838

= 14.6838%

Value of Firm = Free Cash Flows * ( 1 + Growth rate) / (Required rate - Growth rate)

= 39.3 * ( 1 + 2% ) / ( 14.6838% - 2% )

= 39.32 * 1.02 / ( 12.6838% )

= 40.1064 / 12.6838%

= $ 316.20 Million

So, the value of firm is $ 316.20 Million.