You have the following information about the Kellogg Furniture Company (KFC).

• Annual sales in 2020 are $100,000. Sales are expected to grow at 3% a year.

• The cash flows in 2020 have been distributed. The firms enterprise value is evaluated as a claim to its cash

  flows starting from 2021.

• KFCs profit margin is expected to be 26%.

• Tax rate is 0%.

• KFC is expected to reinvest 33% of its NOPAT in fixed assets and net working capital.

• KFC has an equity beta of 1.3.

KFC is financed with 30% debt and 70% equity.

The risk free rate of return is 2.5%, and the expected market risk premium is ( ) = 5%.

KFCs debt is risk free, with a beta of 0.

Hint: Use asset beta if you are analyzing the cost of capital for the firm.

1. a) Calculate KFCs enterprise value (EV) to FCF ratio, EV to NOPAT ratio, and EV to Sales ratio in 2020.

2. b) Estimate the current enterprise value of KFC in 2020.

3. c) Suppose now (in 2020) the firm adjusts its capital structure. Without changing the underlying

   cash flows, the firm issues some debt and buys back some equity. Now debt is 50% and equity is 50%. Suppose debt is still risk free and has a beta of 0. What is the beta of new equity?

A B D E 1 Data 2 Year 3 Sales 4 rf 5 Erm-ra 6 g 7 tax 2020 $100,000 2.5% 5% 3% 0% 8 26% 33% 1.3 30% 70% 9 Net Margin 10 Reinvestment rate 11 Equity beta 12 D/V 13 E/V 14 15 16 17 Solution 18 19 20 Metric Multiple FCF NOPAT Sales 21 22 a) RFC EV/FCF multiple 23 RFC EV/NOPAT multiple 24 RFC EV/Sales multiple 25 26 b) EV 27 28 C) New equity beta 29 A B D E 1 Data 2 Year 3 Sales 4 rf 5 Erm-ra 6 g 7 tax 2020 $100,000 2.5% 5% 3% 0% 8 26% 33% 1.3 30% 70% 9 Net Margin 10 Reinvestment rate 11 Equity beta 12 D/V 13 E/V 14 15 16 17 Solution 18 19 20 Metric Multiple FCF NOPAT Sales 21 22 a) RFC EV/FCF multiple 23 RFC EV/NOPAT multiple 24 RFC EV/Sales multiple 25 26 b) EV 27 28 C) New equity beta 29