Ward Corp. is expected to have an EBIT of $2,750,000 next year. Depreciation, th
ID: 2617717 • Letter: W
Question
Ward Corp. is expected to have an EBIT of $2,750,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $182,000, $119,000, and $132,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $21,500,000 in debt and 820,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,600,000 and the appropriate price–sales ratio is 2.8. 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
The terminal value of the company in Year 5 will be the Year 5 sales times the price–sales ratio, or
Terminal value5= 2.8($17,600,000)
Terminal value5= $ 49280000
The value of the company today is the present value of the first five CFA*s, plus the value today of the terminal value, or
Company value =
5(Terminal
Value)
Company value = $40316695
To find the value of equity, we subtract the value of the debt from the total value of the company, which is:
Equity value = $40316695 - $21,500,000
Equity value = 18816695
Finally, the value per share is the total equity value divided by the shares outstanding, or
Share price = 18816695 / 820,000
Share price = $22.95
Year 1 Year 2 Year 3 Year 4 Year 5 EBIT 2750000 3162500 3636875 4182406 4809767 Depreciation 182000 209300 240695 276799.3 318319.1 Taxes* 962500 1106875 1272906 1463842 1683419 Change in NWC 119000 136850 157377.5 180984.1 208131.7 Capital spending 132000 151800 174570 200755.5 230868.8 CFA* 1718500 1976275 2272716 2613624 3005667 CFA* = EBIT + Depreciation – Taxes* – Change in NWC – Capital spendingRelated Questions
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