Answered step by step
Verified Expert Solution
Link Copied!
Question
1 Approved Answer

A toy company Toys For Kids (TFK) operates two divisions: Electronic Toys and Stuffed Toys. The company is considering spinning off its Electronic Toys division.

image text in transcribed
A toy company Toys For Kids (TFK) operates two divisions: Electronic Toys and Stuffed Toys. The company is considering spinning off its Electronic Toys division. This division started operating recently, and is currently going through a period of rapid growth. The following table summarizes relevant cash flows for the Electronic Toys division: earnings generated by this divisions, as well as necessary net investment investment net of depreciation), the book value of its assets, and free cash flow. The cash flow table projects cash flows and the book value of the Electronic Toys division four years into the future. To value this division, we've collected data on comparable electronic toy companies. On average, these companies trade at a market-to-book multiple of 1.51. We are going to use this multiple to estimate the value of the division at the end of year 4. Cash flow table for the Electronic Toys division Time 0 1 2 3 4 Book Value 10 13 15.5 16.81 17.61 -3.0 0.5 2.5 4.0 Earnings Net Investment Free Cash Flow 3.0 2.5 1.31 0.8 -6.0 -2.0 1.19 3.2 Assume that the appropriate discount rate for the cash flows of the for the Electronic Toys division is 11.48% Compute the market value of the Electronic Toys division at time 0. Enter your answer with two decimal points of precision A toy company Toys For Kids (TFK) operates two divisions: Electronic Toys and Stuffed Toys. The company is considering spinning off its Electronic Toys division. This division started operating recently, and is currently going through a period of rapid growth. The following table summarizes relevant cash flows for the Electronic Toys division: earnings generated by this divisions, as well as necessary net investment investment net of depreciation), the book value of its assets, and free cash flow. The cash flow table projects cash flows and the book value of the Electronic Toys division four years into the future. To value this division, we've collected data on comparable electronic toy companies. On average, these companies trade at a market-to-book multiple of 1.51. We are going to use this multiple to estimate the value of the division at the end of year 4. Cash flow table for the Electronic Toys division Time 0 1 2 3 4 Book Value 10 13 15.5 16.81 17.61 -3.0 0.5 2.5 4.0 Earnings Net Investment Free Cash Flow 3.0 2.5 1.31 0.8 -6.0 -2.0 1.19 3.2 Assume that the appropriate discount rate for the cash flows of the for the Electronic Toys division is 11.48% Compute the market value of the Electronic Toys division at time 0. Enter your answer with two decimal points of precision

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image
Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance An Introduction To Accounting And Financial Management

Authors: Louis C. Gapenski

4th Edition

1567932800, 978-1567932805

More Books

Students explore these related Finance questions