Question

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,890,000 this year. Depreciation, the increase in net working capital, and capital spending are expected to be $227,000, $92,000, and $425,000, respectively. You expect that over the next five years, EBIT will grow at 18 percent per year, depreciation and capital spending will grow at 23 percent per year, and NWC will grow at 13 percent per year. The company currently has $15.5 million in debt and 415,000 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 8.9 percent and the tax rate is 23 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.)

Answer 1

Value of firm = present value of FCF upto year 5 + present value of horizon value at end of year 5

Free Cash flow (FCF) = NOPAT + depreciation - increase in working capital - capital spending

NOPAT = EBIT * (1 - tax rate)

Horizon value at end of year 5 = (Year 5 FCF * (1 + constant growth rate) / (WACC - constant growth rate)

Horizon value at end of year 5 = (5,877,854 * 1.035) / (0.089 - 0.035) = $112,658,872

Present value of horizon value =  $112,658,872 / (1.089)⁵ = $73,557,337

Present value of 5 years FCF = $16,528,362 (see below picture for calculation)

Firm value =  $73,557,337 + $16,528,362 = $90,085,699

Price of stock = firm value / shares outstanding = $90,085,699 / 415,000 = $217.07