Question

Dewey Corp. is expected to have an EBIT of $2,500,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $185,000, $90,000, and $190,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $13,500,000 in debt and 800,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.1 percent indefinitely. The company’s WACC is 8.4 percent and the tax rate is 21 percent. What is the price per share of the company's stock?

Answer 1

FCF = EBIT * (1 -tax rate) + Depreciation - Capex - New working capital
FCF = (2500000 * (1 -21%)) + 185000 - 190000 - 90000
FCF = 2500000 * (1 -21%) + 185000 - 190000 - 90000
Year	1	2	3	4	5
FCF Calculation		=1880000*(1+15%)	=2162000*(1+15%)	=2486300*(1+15%)	=2859245*(1+15%)
FCF	18,80,000.00	21,62,000.00	24,86,300.00	28,59,245.00	32,88,131.75
Present value calculation	=1880000/(1+8.4%)^1	=2162000/(1+8.4%)^2	=2486300/(1+8.4%)^3	=2859245/(1+8.4%)^4	=3288131.75/(1+8.4%)^5
Present value of cash flow	17,34,317.34	18,39,912.31	19,51,936.49	20,70,781.33	21,96,862.12
Total present value of cash flow	97,93,809.60
Terminal value = (FCFF5 * (1+growt rate)) / (WACC - growth rate)
Terminal value = (3288131.75 * (1+2.1%)) / (8.4%-2.1%)
Terminal value = 53288611.38
Present value of terminal value = 53288611.38 /(1+8.4%)^5
Present value of terminal value = 35603114.61
Present value of firm = Present value of terminal value + Present value of cash flows
Present value of firm = 35603114.61 + 9793809.60
Present value of firm = 45,396,924.21
Equity value = Value of firm - Debt
Equity value = 45396924.21 - 13500000
Equity value = 31896924.21
Per share price = Equity value / Shares outstanding
Per share price = 31896924.21 / 800000
Per share price = 39.87