Question

Pearl Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $105,000, and $145,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $12,500,000 in debt and 1,050,000 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 8.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock?

Answer 1

Tax rate	21%
EBIT Growth rate for 4 years	20%
Depreciation growth rate	20%
Capital spending growth rate	20%
NWC growth rate	20%
WACC	8.90%
Terminal growth rate	3.50%
Year	1	2	3	4	5	Terminal Cash Flow = [FCF year 5 *(1+3.5%)/(8.9%-3.5%)]
EBIT	$2,400,000.00	$2,880,000.00	$3,456,000.00	$4,147,200.00	$4,976,640.00
Less: Tax	$504,000.00	$604,800.00	$725,760.00	$870,912.00	$1,045,094.40
Net income	$1,896,000.00	$2,275,200.00	$2,730,240.00	$3,276,288.00	$3,931,545.60
Add: Depreciation	$160,000.00	$192,000.00	$230,400.00	$276,480.00	$331,776.00
Less: change in Net working capital	$105,000.00	$126,000.00	$151,200.00	$181,440.00	$217,728.00
Less: capital spending	$145,000.00	$174,000.00	$208,800.00	$250,560.00	$300,672.00
Free cash flow (FCF)	$1,806,000.00	$2,167,200.00	$2,600,640.00	$3,120,768.00	$3,744,921.60	$71,777,664.00
PV of Free cash Flow	$1,658,402.20	$1,827,440.45	$2,013,708.48	$2,218,962.51	$2,445,137.75	$46,865,140.28
Sum of PVs (value of Firm)	$57,028,791.68
Value of Debt of the company =	$12,500,000.00
Value of Equity (= Value of Firm -Value of Debt)=	$44,528,791.68
No. of shares outstanding =	1,050,000
The price per share of the company's stock (= value of equity / no. of shares outstanding) =	$42.41