Ward Corp. is expected to have an EBIT of $2,450,000 next year. Depreciation, th

Question

Ward Corp. is expected to have an EBIT of $2,450,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $176,000, $107,000, and $126,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $18,500,000 in debt and 810,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company’s WACC is 9.1 percent and the tax rate is 35 percent.

WHAT IS THE PRICE PER SHARE OF THE COMPANY'S STOCK?

Explanation / Answer

FCFF = EBIT*(1-tax rate) + depreciation - Capex - Change in WC

FCFF = 2450000 *(1-35%) + 176000 - 126000 - 107000 = 1535500

FCFF grows at 19% for 4 years, Terminal growth is 3%

Discount all cashflows at 9.1%

Firm value = 1535500 / (1+9.1%) + 1535500*(1+19%) / (1+9.1%)2 + 1535500*(1+19%)2 / (1+9.1%)3 + 1535500*(1+19%)3 / (1+9.1%)4 + 1535500*(1+19%)4 / (1+9.1%)5 + Terminal value / (1+9.1%)5

Terminal value = FCFF*(1+g) / (r-g)

Terminal value =1535500*(1+19%)4 *(1+3%) / (9.1%-3%) = 51993021.44

Firm value = 8435496.6 + 33637313.52 = 42072810.12

Equity value = Firm value - Debt value

   = 42072810.12 - 18500000

   = 23572810.12

Share price = Equity value / number of shares

= 23572810.12 / 810000

= 29.1 $

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