Question

Pearl Corp. is expected to have an EBIT of $2,100,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $90,000, and $130,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $11,000,000 in debt and 900,000 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 8.6 percent and the tax rate is 23 percent.

What is the price per share of the company's stock? (round answer to 2 decimal places)

Answer 1

Expected FCF, FCF1 = EBIT * (1 - Tax) + Depreciation - Increase in Net Working Capital - Capital Spending
Expected FCF, FCF1 = $2,100,000 * (1 - 0.23) + $160,000 - $90,000 - $130,000
Expected FCF, FCF1 = $1,557,000

Growth rate for next 4 years is 17% and a constant growth rate (g) of 3.50%

FCF2 = $1,557,000 * 1.17 = $1,821,690
FCF3 = $1,821,690 * 1.17 = $2,131,377
FCF4 = $2,131,377 * 1.17 = $2,493,711
FCF5 = $2,493,711 * 1.17 = $2,935,098
FCF6 = $2,935,098 * 1.035 = $3,037,826

WACC = 8.60%

Horizon Value of Firm = FCF6 / (WACC - g)
Horizon Value of Firm = $3,037,826 / (0.086 - 0.035)
Horizon Value of Firm = $59,565,216

Value of Firm = $1,557,000/1.086 + $1,821,690/1.086^2 + $2,131,377/1.086^3 + $2,493,711/1.086^4 + $2,935,098/1.086^5 + $59,565,216/1.086^5
Value of Firm = $47,809,674

Value of Equity = Value of Firm - Value of Debt
Value of Equity = $47,809,674 - $11,000,000
Value of Equity = $36,809,674

Price per share = Value of Equity / Shares Outstanding
Price per share = $36,809,674 / $900,000
Price per share = $40.90

So, price per share is $40.90