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 1.5, a debt-to-equity ratio of 0.3, and a tax rate of 40 percent. Assume a risk-free rate of 4 percent and a market risk premium of 12 percent. Lauryn’s Doll Co. had EBIT last year of $45 million, which is net of a depreciation expense of $4.5 million. In addition, Lauryn's made $4.25 million in capital expenditures and increased net working capital by $4.1 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.)

Firm value= million

Answer 1

Solution:
	Firm value $	136.85	millions
Working Notes:
	First of all we will calculate cost of capital of the firm for that we will get Beta of assets of the firm using Hamada equation
	B assets = Beta equity/(1+ (debt/equity) x (1-tax rate))
	B assets = 1.5/(1+ (0.30) x (1-0.40))
	B assets = 1.5/(1+ 0.18)
	B assets =1.27118644
	Now we calculate of cost of capital using CAPM
	K= rf + (rm-rf) x beta of assets
	rf= risk free rate = 4%
	market risk premium = rm -rf = 12%
	beta of assets = 1.27118644
	K= cost of capital of the firm = ?
	K= rf + (rm-rf) x beta of assets
	K= 4%+ 12% x 1.27118644
	K= 4%+ 12% x 1.27118644
	K= 19.254237288%
Now we will calculate Free cash flow to the firm FCF
	Free Cash Flow to Firm (FCFF)
	= EBIT ( 1 -Tax rate) + Depreciation - Capital expenditure - Change in Working Capital
	= 45 x (1-0.40) + 4.5-4.25- 4.1
	= 27 + 4.5 -4.25- 4.1
	=$23.15 million
	Firm value = FCFF x ( 1+g)/(K -g)
	Free Cash Flow to Firm (FCFF) = $23.15 million
	K= cost of capital of the firm = 19.254237288%
	Growth rate g= 2%
	Firm value = FCFF x ( 1+g)/(K -g)
	Firm value = $23.15 x ( 1+0.02)/(19.254237288% -2%)
	Firm value = $23.15 x ( 1+0.02)/0.172542373
	Firm value =$136.85333
	Firm value =$136.85 million
Please feel free to ask if anything about above solution in comment section of the question.