Ward Corp. is expected to have an EBIT of $2,550,000 next year. Depreciation, th
ID: 2727393 • Letter: W
Question
Ward Corp. is expected to have an EBIT of $2,550,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $178,000, $111,000, and $128,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $19,500,000 in debt and 830,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company’s WACC is 9.3 percent and the tax rate is 35 percent. What is the price per share of the company's stock?
Explanation / Answer
Free cash flow 1= EBIT x (1-t) + Depreciation - change in net working capital – capital spending
= 2,550,000 x (1- 0.35) +178,000 – 111,000 - 128,000
= $1,596,500
Now this FCF is expected to grow at 15% per annum:
FCF1 = $1,596,500
FCF2 = 1835975
FCF3= 2111371
FCF4= 2428077
FCF5= 2792288
Value of firm at the end of year 5 = FCF5 x (1+g)/ (R-g)
= 2792288x (1+0.025)/(0.093 – 0.025)
= 42089635.29
Year
cash flow
PV Factor 9.30%
PV
1
1596500
0.91491
1460658.737
2
1835975
0.83707
1536832.157
3
2111371
0.76584
1616978.025
4
2428077
0.70068
1701303.503
5
2792288
0.64106
1790026.558
5
42089643
0.64106
26982017.97
35087816.95
Value of equity = value of firm – value of debt
= 35087816.95 -19,500,000
= 15587816.95
Price per share = value of equity / no. of shares
= 15587816.95 / 830000
= 18.78
Year
cash flow
PV Factor 9.30%
PV
1
1596500
0.91491
1460658.737
2
1835975
0.83707
1536832.157
3
2111371
0.76584
1616978.025
4
2428077
0.70068
1701303.503
5
2792288
0.64106
1790026.558
5
42089643
0.64106
26982017.97
35087816.95