You have been asked to value Tiddly Winks Toys, a privately held firm.

• In the most recent financial year, Tiddly Winks Toys reported after-tax operating income of $12 million and earned an after-tax return on capital of 12% on invested capital.
• Tiddly Winks has no debt, but the unlevered beta of publicly traded toy companies is 1.20 (and the average R-squared across these companies is 16%).
• The riskfree rate is 5% and the risk premium is 4%.

a. As a provate undiversified company, what is the total Beta of Tiddly Winks Toys?

b. What is Tiddly Winks Toyss reinvestment rate?

c. Value Tiddly Winks Toys for sale as a private business, run as is. (You can assume that the return on capital will remain unchanged and that the firm will grow 3% a year in perpetuity).

d. Now assume that a publicly traded firm is considering bidding for 51% of Tinker Toys. Assuming that the public traded firm is well diversified, continues to fund its operations entirely with equity and that it can increase the after-tax return on capital to 18% on future investments, estimate the maximum price that can be paid for 51% of Tiddly Winks Toys.