Question

Ward Corp. is expected to have an EBIT of $2,750,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $182,000, $119,000, and $132,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $21,500,000 in debt and 820,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,600,000 and the appropriate price–sales ratio is 2.8. The company’s WACC is 9.3 percent and the tax rate is 35 percent. What is the price per share of the company's stock?

Answer 1

	Year 1	Year 2	Year 3	Year 4	Year 5
EBIT	2750000	3162500	3636875	4182406	4809767
Depreciation	182000	209300	240695	276799.3	318319.1
Taxes*	962500	1106875	1272906	1463842	1683419
Change in NWC	119000	136850	157377.5	180984.1	208131.7
Capital spending	132000	151800	174570	200755.5	230868.8
CFA*	1718500	1976275	2272716	2613624	3005667
CFA* = EBIT + Depreciation – Taxes* – Change in NWC – Capital spending

The terminal value of the company in Year 5 will be the Year 5 sales times the price–sales ratio, or

Terminal value5= 2.8($17,600,000)

Terminal value5= $ 49280000

The value of the company today is the present value of the first five CFA*s, plus the value today of the terminal value, or

Company value =

Year	1	2	3	4	5	5(Terminal Value)
CFA*	1718500	1976275	2272716	2613624	3005667	49280000
PVF (9.3%)	0.914913	0.837066	0.765843	0.700679	0.641061	0.641061
PVCF	1572278	1654273	1740543	1831312	1926815	31591474

Company value = $40316695

To find the value of equity, we subtract the value of the debt from the total value of the company, which is:

Equity value = $40316695 - $21,500,000

Equity value = 18816695

Finally, the value per share is the total equity value divided by the shares outstanding, or

Share price = 18816695 / 820,000

Share price = $22.95