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 1.7, a debt-to-equity ratio of 0.4, and a tax rate of 30 percent. Assume a risk-free rate of 6 percent and a market risk premium of 11 percent. Lauryn’s Doll Co. had EBIT last year of $56 million, which is net of a depreciation expense of $5.6 million. In addition, Lauryn's made $5.3 million in capital expenditures and increased net working capital by $2.7 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm

Answer 1

The value of Lauryn's Doll Co. using the FCF model is $102 million.

Step-by-step explanation:

To value Lauryn's Doll Co. using the Free Cash Flow (FCF) model, we need to calculate the Free Cash Flows and discount them to their present value. Here are the steps:

1. Calculate the Free Cash Flows (FCF) by subtracting the capital expenditures and the increase in net working capital from EBIT. FCF = EBIT - Capital Expenditures - Increase in Net Working Capital = $56 million - $5.3 million - $2.7 million = $48 million.
2. Calculate the Weighted Average Cost of Capital (WACC) using the equity beta, debt-to-equity ratio, and tax rate. WACC = (Equity Beta * Cost of Equity) + (Debt-to-Equity Ratio * Cost of Debt * (1 - Tax Rate)).
3. Calculate the Present Value of the Free Cash Flows by discounting them using the WACC and the growth rate. PV = FCF / (WACC - Growth Rate) = $48 million / (WACC - 0.03) = $102 million.

Therefore, the value of Lauryn's Doll Co. using the FCF model is $102 million.