You have looked at the current financial statements for Reigle Homes, Co. The co

Question

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,930,000 this year. Depreciation, the increase in net working capital, and capital spending were $229,000, $94,000, and $435,000, respectively. You expect that over the next five years, EBIT will grow at 20 percent per year, depreciation and capital spending will grow at 25 per year, and NWC will grow at 15 per year. The company currently has $15,900,000 in debt and 465,000 shares outstanding. At Year 5, you believe sales will be $19,850,000 and the pricesales ratio will be 2.8. The company’s WACC is 8.3 percent and the tax rate is 35 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.) Share price $

Explanation / Answer

Forecast EBIT, Depreciation, working capital and capital spending for the next five years given their growth rates.

Free cash flow (FCF) = EBIT x (1 - tax) + Depreciation - Working Capital - Capex, where tax = 35%

Terminal Value at year 5, TV5 = Sales x P/S = 19,850,000 x 2.8 = $55,580,000

Firm Value = NPV(rate = 8.3%, 1919800, 2296290.....3921276+55580000) = $48,215,430

Equity Value = Firm Value - Debt

= 48,215,430 - 15,900,000

= 32,315,430

Price per share = Equity Value / No. of shares = 32,315,430 / 465,000 = $69.50

0 1 2 3 4 5 EBIT $      2,930,000 $      3,516,000 $      4,219,200 $      5,063,040 $      6,075,648 $   7,290,778 Depreciation $         229,000 $         286,250 $         357,813 $         447,266 $         559,082 $      698,853 NWC $           94,000 $         108,100 $         124,315 $         142,962 $         164,407 $      189,068 Capex $         435,000 $         543,750 $         679,688 $         849,609 $      1,062,012 $   1,327,515 FCF $      1,604,500 $      1,919,800 $      2,296,290 $      2,745,670 $      3,281,835 $   3,921,276 Terminal Value $ 55,580,000 Firm Value $48,215,430 Equity Value $32,315,430 Share Price $69.50

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