Ward Corp. is expected to have an EBIT of $2,250,000 next year. Depreciation, th
ID: 2727436 • Letter: W
Question
Ward Corp. is expected to have an EBIT of $2,250,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $172,000, $99,000, and $122,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $16,500,000 in debt and 820,000 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 8.7 percent and the tax rate is 35 percent. What is the price per share of the company's stock?
Explanation / Answer
Stock price = Sum of discounted future Free Cash Flow to Firm (FCFF) / Number of shares outstanding, where
FCFF = EBIT x (1 - Tax rate) + Depreciation (DEPR) - Capital expenditure (CapEX) - Working capital (WC)
So, FCFF at year 5 = $2,472,220
Sum of Present value (PV) of FCFF from years 1-5 = $9,530,356 ....(1)
PV of all future FCFF starting year 6 ($) = 2,472,220 x 1.025 / (0.087 - 0.025) = 2,534,025.5 / 0.062
= 40,871,379 ......(2)
Sum of all future discounted FCFF ($) = (1) + (2) = 9,530,356 + 40,871,379 = 50,401,735
So, Stock price per share = $50,401,735 / 820,000 = $61.47
Year EBIT EBITx0.65 DEPR WC CapEx FCFF 1 22,50,000 14,62,500 1,72,000 99,000 1,22,000 14,13,500 2 25,87,500 16,81,875 1,97,800 1,13,850 1,40,300 16,25,525 3 29,75,625 19,34,156 2,27,470 1,30,928 1,61,345 18,69,354 4 34,21,969 22,24,280 2,61,591 1,50,567 1,85,547 21,49,757 5 39,35,264 25,57,922 3,00,829 1,73,152 2,13,379 24,72,220 SUM ($) = 95,30,356