Ward Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, th

Question

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

Given Price -sales ratio Year 5=2.1 Sales =16900000 Marker Price at Yr 5 =16900000*2.1=    35,490,000 Details Year 1 Year 2 Year 3 Year 4 Year 5 EBIT         2,400,000         2,832,000     3,341,760          3,943,277 Income Tax @40%        (960,000)      (1,132,800) (1,336,704)        (1,577,311) Unlevered net Income       1,440,000         1,699,200     2,005,056          2,365,966 Add Depreciation          175,000            206,500         243,670              287,531 Less Net working capital increase        (105,000)          (123,900)      (146,202)            (172,518) Less Capital Expenditure        (125,000)          (147,500)      (174,050)            (205,379) FCF         1,385,000         1,634,300     1,928,474          2,275,599 Discount Factor @9%             0.9174               0.8417           0.7722                0.7084               0.6499 PV of FCF =       1,270,642         1,375,558     1,489,136          1,612,092 Sum of FCF PV year 1-4=       5,747,428 Market Value at year 5       35,490,000 PV of Market Value Yr 5    23,066,065 Total Market Value    28,813,492 Less Value of debt    18,000,000 Market Value of equity    10,813,492 No of common stock outstanding            850,000 Price per Share $           12.72

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