Stuart, Inc. reported net income of $20 million for last year. Depreciation expe
ID: 2783674 • Letter: S
Question
Stuart, Inc. reported net income of $20 million for last year. Depreciation expense totaled $15 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 6% for the foreseeable future. Stuart faces a 40% tax rate and has a 0.30 debt to equity ratio with $75 million (market value) in debt outstanding. Stuart's equity beta is 1.1, the risk-free rate is currently 6% and the market risk premium is estimated to be 8%. What is the current value (in millions) of Stuart's equity? This was all the information given.
Explanation / Answer
Step 1:
Asset Beta = 1.1/ (1 + 0.3 * (1 - 0.40))
Asset Beta = 0.93
Step 2:
Required Return = 6% + 0.93 * 8% = 13.44%
Step 3:
FCF = 20 + 15 - 5 = 30
Step 4:
Firm value = 30 * (1 + 0.06)/ (0.1344 - 0.06)
Firm value = 427.42
Step 5:
Equity Value = 427.42 - 75
Equity value = 352.42