Question

Lambert Corporation reported EBIT of $60 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future. Lambert faces a 40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in debt outstanding. Lambert's equity beta is 1.25, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%. What is the current total value of Lambert's equity (in millions)?

Answer 1

Answer:

$587.39

Explanation:

Value of equity can be determined by calculating the value of the firm.

We need to calculate free cash flow first

EBIT                                      $60 million

Less: Tax 40%                     $24 million

NOPAT                                $36 million

Add: Depreciation              $20 million

Less: Capital Expenditure  $5 million  

Free cash flow                    $51 million  

Now calculate the required rate of return

Levered Beta = 1.25 / (1 + (0.45) x (1-40%)) = 0.98

Required Return = Rf + Beta ( Risk Premium )

Required Return = 5% + 0.98 ( 6.5% )

Required Return = 11.4%

Value of Operation = $51 x ( 1 + 4.5%) / (11.4% - 4.5%) = $772,39

Debt = $185

As we know net asset value is the value of equity og the firm which can be calculated by deducting debt from total value of the firm.

Value of Equity = $772..39 - $185 = $587.39