You are going to value Lauryn’s Doll Co. using the FCF model. After consulting v
ID: 2759351 • Letter: Y
Question
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.7, a debt-to-equity ratio of .6, and a tax rate of 30 percent. Assume a risk-free rate of 3 percent and a market risk premium of 7 percent. Lauryn’s Doll Co. had EBIT last year of $58 million, which is net of a depreciation expense of $5.8 million. In addition, Lauryn made $6.3 million in capital expenditures and increased net working capital by $2.5 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm?
Explanation / Answer
Rate of discount will be calulated using the CAPM model-
Rm = Rf + B(Rm-Rf)
Rm= 3 + 7*1.7= 14.9
FCFF = NI + NCC + [Int x (1-tax rate)] – FCInv – WCInv
Where:
NI = Net Income
NCC = Non-cash Charges (depreciation and amortization)
Int = Interest Expense
FCInv = Fixed Capital Investment (total capital expenditures)
WCInv = Working Capital Investments
FCFF= 58mn + 5.8mn -6.3mn -2.5mn = 52.5
So the value of the firm will be = FCFF/r-g
= 52.5 / 14.9-3
=441.18mn
Debt to equity ration given in the question will be ignored since that is used when FCFE is to be worked out.