Ward Corp. is expected to have an EBIT of $2,850,000 next year. Depreciation, th
ID: 2765515 • Letter: W
Question
Ward Corp. is expected to have an EBIT of $2,850,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $184,000, $123,000, and $134,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $22,500,000 in debt and 840,000 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 9.1 percent and the tax rate is 35 percent.
Ward Corp. is expected to have an EBIT of $2,850,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $184,000, $123,000, and $134,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $22,500,000 in debt and 840,000 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 9.1 percent and the tax rate is 35 percent.
Explanation / Answer
Tax Rate Tax Rate 35.0% growth rate yrs 1-5 g 19.0% Perpetual growth in cash flows after 5 yrs gL 2.5% Discount rate(required return) Wacc 9.1% PV=Present value,FCF=EBIT(1-TaxRate)+depreciation expense- capital expenses-chg in WorkingCapital 2.5% growth to perpetuity… Year 0 1 2 3 4 5 6 EBIT 28,50,000.00 33,91,500.00 40,35,885.00 48,02,703.15 57,15,216.75 EBIT(1-TaxRate) 18,52,500.00 22,04,475.00 26,23,325.25 31,21,757.05 37,14,890.89 (+depreciation expense 1,84,000.00 2,18,960.00 2,60,562.40 3,10,069.26 3,68,982.41 (- capital expenses 1,34,000.00 1,59,460.00 1,89,757.40 2,25,811.31 2,68,715.45 (-chg in WorkingCapital 1,23,000.00 1,46,370.00 1,74,180.30 2,07,274.56 2,46,656.72 Free Cash Flow(FCF) 17,79,500.00 21,17,605.00 25,19,949.95 29,98,740.44 35,68,501.12 firm's horizon, or continuing, value(TV) 5,54,19,903.82 PV of CF next 5 years(=FCF/(1+Wacc)^Year) 16,31,072.41 17,79,079.90 19,40,517.95 21,16,605.28 23,08,671.20 PV of firm's horizon, or continuing, value(TV) $ 3,58,54,363.31 (=TV/(1+Wacc)^5) (TV=Free Cash Flow in yr 6/(Wacc-g) Total present value free cash flows next 5 years $ 97,75,946.73 (=sum of PV of FCFs yrs1-5) (=Free Cash Flow in yr 5*(1+gL)/(Wacc-gL)) the firm's total value today(V) $ 4,56,30,310.04 (=PV of TV+Total present value free cash flows next 5 years) market value of its debt& preferred stock(D) $ 2,25,00,000.00 value of Equity(E=V-D) $ 2,31,30,310.04 shares of common stock outstanding(N) 8,40,000 price per share of the company's stock(E/N) $ 27.54
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