Question

Pearl Corp. is expected to have an EBIT of $1,900,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $80,000, and $120,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $10,000,000 in debt and 800,000 shares outstanding. At Year 5, you believe that the company's sales will be $13,620,000 and the appropriate price-sales ratio is 2.1. 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Price per share = (firm value - debt) / shares outstanding

firm value = present value of next 4 years FCF + present value of terminal value at end of 4 years

FCF in Year 1 = (EBIT * (1 - tax rate)) + depreciation - increase in working capital - capital spending

FCF in years 2 to 4 will increase by 15% each year

Terminal value at end of 4 years = sales * price sales ratio = $13,620,000 * 2.1 = $28,602,000

Firm value is calculated as below :

Firm value = $26,618,528

Price per share = (firm value - debt) / shares outstanding

Price per share = ($26,618,528 - $10,000,000) / 800,000

Price per share = $20.77