Problem 14-25 Adjusted Cash Flow From Assets [LO3] Ward Corp. is expected to hav
ID: 2727610 • Letter: P
Question
Problem 14-25 Adjusted Cash Flow From Assets [LO3]
Ward Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $175,000, $105,000, and $125,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $18,000,000 in debt and 850,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,900,000 and the appropriate pricesales ratio is 2.1. The company’s WACC is 9 percent and the tax rate is 40 percent.
What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Ward Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $175,000, $105,000, and $125,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $18,000,000 in debt and 850,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,900,000 and the appropriate pricesales ratio is 2.1. The company’s WACC is 9 percent and the tax rate is 40 percent.
Explanation / Answer
PRICE-SALES RATIO
= PRICE PER SHARE / ANNUAL NET SALES PER SHARE
2.1 = PRICE PER SHARE / ($16900000 / 850000)
PRICE PER SHARE = 2.1 * $19.8824
PRICE PER SHARE = $41.75