Question

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3,130,000 this year. Depreciation, the increase in net working capital, and capital spending were $239,000, $104,000, and $485,000, respectively. You expect that over the next five years, EBIT will grow at 20 percent per year, depreciation and capital spending will grow at 25 per year, and NWC will grow at 15 per year. The company currently has $17,900,000 in debt and 515,000 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 8.7 percent and the tax rate is 35 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

Tax rate	35%
EBIT Growth rate for 5 years	20%
Depreciation growth rate	25%
Capital spending growth rate	25%
NWC growth rate	15%
WACC	8.70%
Terminal growth rate	3.50%
Year	0	1	2	3	4	5	Terminal Cash Flow = [FCF year 5 *(1+3.5%)/(8.7%-3.5%)]
EBIT	$3,130,000	$3,756,000	$4,507,200	$5,408,640	$6,490,368	$7,788,442
Less: Tax	$1,095,500	$1,314,600	$1,577,520	$1,893,024	$2,271,629	$2,725,955
Net income	$2,034,500.00	$2,441,400.00	$2,929,680.00	$3,515,616.00	$4,218,739.20	$5,062,487.04
Add: Depreciation	$239,000.00	$298,750.00	$373,437.50	$466,796.88	$583,496.09	$729,370.12
Add: change in Net working capital	$104,000.00	$130,000.00	$162,500.00	$203,125.00	$253,906.25	$317,382.81
Less: capital spending	$485,000.00	$557,750.00	$641,412.50	$737,624.38	$848,268.03	$975,508.24
Free cash flow (FCF)		$2,312,400.00	$2,824,205.00	$3,447,913.50	$4,207,873.51	$5,133,731.73	$102,181,006.62
PV of Free cash Flow		$2,127,322.91	$2,390,215.89	$2,684,526.71	$3,014,008.69	$3,382,871.10	$67,332,145.98
Sum of PVs (value of Firm)	$80,931,091.28
Value of Debt of the company =	$17,900,000.00
Value of Equity (= Value of Firm -Value of Debt)=	$63,031,091.28
No. of shares outstanding =	515,000
The price per share of the company's stock (= value of equity / no. of shares outstanding) =	$122.39

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