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 $3,130,000 this year. Depreciation, the increase in net working capital, and capital spending were $239,000, $104,000, and $485,000, 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 $17,900,000 in debt and 515,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.7 percent and the tax rate is 35 percent. What is the price per share of the company's stock?

Explanation / Answer

The free cash flows of the firm in various years are as follows:

OFCF = EBIT(1-T) + depreciation - CAPEX - working capital

Discounted OFCF = OFCF/ 1.087^n

Value of the firm in year 6 = OFCF / (WACC- Growth rate)

= 3760775*103.5% / (8.7%-3.5%)

= $74853887

This should be discounted to find the present value = $74853887/ 1.087^6 =

Total Value of firm = 45377137+ P V of OFCF from years 1-5=

Value of equity =

55717217- 17900000=

Stock price =

37817217/515000

= $73.43

Year EBIT Depreciation Capex Working capital OFCF Discounted OFCF 1 3130000 239000 485000 104000 1841000 1693652 2 3756000 298750 606250 119600 2202100 1863708 3 4507200 373437.5 757812.5 137540 2633125 2050137 4 5408640 466796.9 947265.6 158171 3147408 2254420 5 6490368 583496.1 1184082 181896.7 3760775 2478162

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