Ward Corp. is expected to have an EBIT of $2,050,000 next year. Depreciation, th

Question

Ward Corp. is expected to have an EBIT of $2,050,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $168,000, $91,000, and $118,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $14,500,000 in debt and 830,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,200,000 and the appropriate price–sales ratio is 2.3. The company’s WACC is 8.3 percent and the tax rate is 35 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.)

Share price            $

Please show all work.

Explanation / Answer

In the 5th Year total Value of the company’s sales would be $16,200,000

Price to Sales Ratio is 2.3

So Market Price/ Sales = 2.3

Or, Market Price =2.3*16,200,000

Or, MP = $37260000

This Market Value of $37260000 is obtained in the 5th year

So, PV of the company’s Value = Market Value/ (1+ WACC) ^5

WACC = 8.3%

So, PV of the Market Value of the company = $37260000/ (1.083) ^5 = $2, 50, 09,244.21 (assuming that the value of the company stood at the end of the 5th year)

Total No. of outstanding shares was 830,000

So, Price per stock would be = $250, 09,244.21/830,000 = $30.13

Note: We calculated the PV of the company since at current time the shares stood at 830,000 and sales value was at the end of the 5th year so we discounted it at current times

So the Share Price of the company’s stock is $30.13

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