Question

Dewey Corp. is expected to have an EBIT of $3,250,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $260,000, $165,000, and $265,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $21,000,000 in debt and 875,000 shares outstanding. At Year 5, you believe that the company's sales will be $29,000,000 and the appropriate price-sales ratio is 2.5. The company’s WACC is 8.8 percent and the tax rate is 21 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

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Price per share of the company's stock = $45.26

Workings:

Year	EBIT	Tax	EBIT - Tax	Depreciation	Increase in NWC	Capital spending	FCF
			a	b	c	d	(a+b-c-d)
1	3250000	682500	2567500	260000	165000	265000	2397500
2	3835000	805350	3029650	306800	194700	312700	2829050
3	4525300	950313	3574987	362024	229746	368986	3338279
4	5339854	1121369	4218485	427188	271100	435403	3939169
5	6301028	1323216	4977812	504082	319898	513776	4648220

Type	Cash flows	PV @ 8.8%	Present value
	(a)	(b)	(a*b)
FCF 1	2397500	0.919117647	2203584.559
FCF 2	2829050	0.844777249	2389917.077
FCF 3	3338279	0.776449678	2592005.653
FCF 4	3939169.22	0.713648601	2811182.602
FCF 5	4648219.68	0.655927023	3048892.895
Firm value at the end of year 5	72500000 [29,000,000*2.5]	0.655927023	47554709.14
Value of the firm			60600291.93
Less :Value of debt			21000000
Value of equity			39600292
No of shares			875000
Value per share			45.26