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%.

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

2. What is Tiddly Winks Toys’s reinvestment rate?

3. 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).

4. 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.

Answer rating: 100% (QA)

1The total beta of Tiddly Winks Toys is 120 016 136 The total beta of Tiddly Winks Toys is 120 016 136 This is because the unlevered beta of publicly traded toy companies is 120 and the average Rsquar... View the full answer