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. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. 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, NWC and Capex spending and calculate free cash flows (FCF) given the growth rates

FCF = EBIT x (1 - T) + Depreciation - NWC - FCInv

Terminal Value in year 5 (TV5) = FCF5 x (1 + g) / (r - g) = 3,921,276 x (1 + 3%) / (8.3% - 3%) = $76,205,925

Firm Value today = FCF1 / (1 + r) + FCF2 / (1 + r)^2 + FCF3 / (1 + r)^3 + FCF4 / (1 + r)^4 + (FCF5 + TV5) / (1 + r)^5

= 1,919,800 / 1.083 + 2,296,290 / 1.083^2 + 2,745,670 / 1.083^3 + 3,281,835 / 1.084^4 + (3,921,276 + 76,205,925) / 1.083^5

= $62,059,734

You can calculate this also using NPV function on a calculator or excel

Equity Value = Firm Value - Debt

= 62,059,734 - 15,900,000 = $46,159,734

Price per share = $46,159,734 / 465,000 = $99.27

Year 0 1 2 3 4 5 6 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 FCInv 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 4,038,914

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