Question

Pearl Corp. is expected to have an EBIT of $3,700,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $170,000, and $210,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $19,000,000 in debt and 1,150,000 shares outstanding. At Year 5, you believe that the company's sales will be $29,410,000 and the appropriate price-sales ratio is 2.9. The company’s WACC is 9.4 percent and the tax rate is 24 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

Answer 1

Expected FCF, FCF1 = EBIT * (1 - tax) + Depreciation - Increase in NWC - Capital Spending
Expected FCF, FCF1 = $3,700,000 * (1 - 0.24) + $160,000 - $170,000 - $210,000
Expected FCF, FCF1 = $2,592,000

Growth rate for next 4 years is 18%

FCF2 = $2,592,000 * 1.18 = $3,058,560
FCF3 = $3,058,560 * 1.18 = $3,609,101
FCF4 = $3,609,101 * 1.18 = $4,258,739
FCF5 = $4,258,739 * 1.18 = $5,025,312

Horizon Value of Firm = Price-Sales Ratio * Sales
Horizon Value of Firm = 2.90 * $29,410,000
Horizon Value of Firm = $85,289,000

WACC = 9.40%

Value of Firm today = $2,592,000/1.094 + $3,058,560/1.094^2 + $3,609,101/1.094^3 + $4,258,739/1.094^4 + $5,025,312/1.094^5 + $85,289,000/1.094^5
Value of Firm today = $68,287,204

Value of Equity = Value of Firm - Value of Debt
Value of Equity = $68,287,204 - $19,000,000
Value of Equity = $49,287,204

Price per share = Value of Equity / Shares Outstanding
Price per share = $49,287,204 / 1,150,000
Price per share = $42.86