Pearl Corp. is expected to have an EBIT of $2,800,000 next year. Depreciation, t

Question

Pearl Corp. is expected to have an EBIT of $2,800,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $125,000, and $165,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $14,500,000 in debt and 950,000 shares outstanding. At Year 5, you believe that the company's sales will be $22,260,000 and the appropriate price-sales ratio is 31. The company's WACC is 9.4 percent and the tax rate is 25 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

Soln : Step 1: Calculate the cash flows in these 5 years where data is given, please refer the table for the same :

Cash fows net = EBIT + Dep.-Taxes - Capital Spending - Net working Capital , is calculated in table :

Step 2 The terminal value of the company after 5 years can be calculated using Price to sales ratio = 3.1*22260000 = 69006000

Step 3: Now, if we will sum the present values of cash flows and Terminal value we will get the Value of the firm:

V = 1970000/(1+9.4%)1 + 2324600/(1+9.4%)2 +........+3819392/(1+9.4%)5 + 69006000/(1+9.4%)5

V = 54570171

Step 4 : Value of debt given = 14500000

Value of equity : E = 54570171 - 14500000= 40070171

No. of shares = 950000

Price per share = 40070171/950000 = $42.18

Year 1 2 3 4 5 EBIT 2800000 3304000 3898720 4600490 5428578 Dep. 160000 188800 222784 262885 310204 Net working capital 125000 147500 174050 205379 242347 Capital spending 165000 194700 229746 271100 319898 Taxes 700000 826000 974680 1150122 1357144 CF 1970000 2324600 2743028 3236773 3819392

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