Question

Ward Corp. is expected to have an EBIT of $2,100,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $169,000, $93,000, and $119,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $15,000,000 in debt and 840,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,300,000 and the appropriate price–sales ratio is 2.4. The company’s WACC is 8.4 percent and the tax rate is 40 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

Formula sheet

A	B	C	D	E	F	G	H	I	J
2
3		Value of the firm need to be calculated first by finding the present value of free cash flows.
4
5		Free cash flow can be calculated as follows:
6		Free Cash Flow = Operating Cash Flow - Capital Expenditures - Change in working capital
7		Operating Cash Flow = EBIT*(1-Tax Rate)+Depreciation
8
9		Growth rate	0.18
10		Tax Rate	0.4
11		WACC	0.084
12
13		Sales in Year 5	16300000
14		Price to Sales Ratio	2.4
15		Market Value of the firm in Year 5	=D13*D14	=D13*D14
16
17		Year	0	1	2	3	4	5
18		EBIT		=2100000	=E18*(1+$D$9)	=F18*(1+$D$9)	=G18*(1+$D$9)
19		Tax Expense (40%)		=-E18*40%	=-F18*40%	=-G18*40%	=-H18*40%
20		EBIT*(1-T)		=SUM(E18:E19)	=SUM(F18:F19)	=SUM(G18:G19)	=SUM(H18:H19)
21		Plus Depreciation		169000	=E21*(1+$D$9)	=F21*(1+$D$9)	=G21*(1+$D$9)
22		Operating Cash flow		=E20+E21	=F20+F21	=G20+G21	=H20+H21
23		Increase in Net working capital		-93000	=E23*(1+$D$9)	=F23*(1+$D$9)	=G23*(1+$D$9)
24		Capital Spending		-119000	=E24*(1+$D$9)	=F24*(1+$D$9)	=G24*(1+$D$9)
25		Free Cash Flow		=E22+E23+E24	=F22+F23+F24	=G22+G23+G24	=H22+H23+H24	=D15
26		WACC	=D11
27		Present Value factor		=1/((1+$D$26)^E17)	=1/((1+$D$26)^F17)	=1/((1+$D$26)^G17)	=1/((1+$D$26)^H17)	=1/((1+$D$26)^I17)
28		Present Value of cash flows		=E25*E27	=F25*F27	=G25*G27	=H25*H27	=I25*I27
29		Present Value of firm	=SUM(E28:I28)	=SUM(E28:I28)
30
31		Value of the Firm	=D29
32		Debt Value	15000000
33		Equity value	=D31-D32	=D31-D32
34
35		Number of shares outstanding	840000
36
37		Price per share	=Equity Value / Number of Shares outstanding
38			=D33/D35	=D33/D35
39
40		Hence Price per share	=D38
41
42