Ward Corp. is expected to have an EBIT of $2,800,000 next year. Depreciation, th
ID: 2727572 • Letter: W
Question
Ward Corp. is expected to have an EBIT of $2,800,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $183,000, $121,000, and $133,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $22,000,000 in debt and 830,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,700,000 and the appropriate pricesales ratio is 2.9. The company’s WACC is 9.2 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.)
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.)
Explanation / Answer
Price sales ratio = 2.9
Price = 17700000 * 2.9
= 51330000
Debt = 22000000
Debt = 70%
Equity = 30%
assuming rate of Debt = 5%
Free cash flows = Net income - [(1- debt) *( Capital exp - Dep) + (1-debt)*(Working captial)]
= 1020000 - [(1- .70)*(133000-183000) + (1-0.70)*121000]
=1020000 - 21300
= 998700
Free cashflow per share = 998700/830000 = 1.2
price per share of company stock = FCF (1+g)4 / k
= 1.20 *(1+0.20)4 / 0.062
= $40.13 per share
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