Ward Corp. is expected to have an EBIT of $2,700,000 next year. Depreciation, th

ID: 2727523 • Letter: W

Question

Ward Corp. is expected to have an EBIT of $2,700,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $181,000, $117,000, and $131,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $21,000,000 in debt and 810,000 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 9.4 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 final answer to 2 decimal places, e.g., 32.16.)

$0.39 IS NOT THE ANSWER

Explanation / Answer

Note: As firm has debt outstanding, it must have an interest rate to calculate its correct adjusted cash flow from assets. However, as the question posted doesn’t talk anything about it, we have assume it to be 8% annually and done the calculations accordingly. In case of any other interest rate, please change the figure for it and re-calculate yourself.

EBIT

$2,700,000.00

Less: Interest

$1,680,000.00

EBT

$1,020,000.00

Less: Tax @ 40%

$408,000.00

Net Income

$612,000.00

Add: Depreciation

$181,000.00

Less: NWC

$117,000.00

Less: Capital spending

$131,000.00

Cash Flow from asset

$545,000.00

Cash flow per share = $545,000/810,000 = $0.67
Cash flow in per share in Year 2 = $0.67 x 1.18 = $0.79
Cash flow in per share in Year 3 = $0.67 x 1.182 = $0.94
Cash flow in per share in Year 4 = $0.67 x 1.183 = $1.11
Cash flow in per share in Year 5 = $0.67 x 1.184 = $1.30
Terminal Value per share = (Cash flow per share in Year 5 x 1.025)/(0.095 – 0.025) = $19.38

Present Values of cash flows:

Year 1 = $0.67/1.094 = $0.62
Year 2 = $0.79/1.0942 = $0.66
Year 3 = $0.94/1.0943 = $0.72
Year 2 = $1.11/1.0944 = $0.77
Year 2 = $1.30/1.0945 = $0.83
Terminal Value = $19.38/1.0946 = $11.30

Price of share will be sum of all present values of cash flows:

Price of share = $14.90