Question

Ward Corp. is expected to have an EBIT of $1.9 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $85,000, and $115,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $13,000,000 in debt and 800,000 shares outstanding. At Year 5,th adjusted cash flow from assets is expected to grow at 3% indefinitely. The company’s WACC is 8.5 percent and the tax rate is 50 percent. What is the price per share of the company's stock?

Answer 1

First, we need to find the adjusted cash flow from assets (CFA*) for each year. We are given the projected EBIT,depreciation, increase in NWC, and capital spending. Each of these accounts increase at 15 percent per year. So, the CFA*for each of the next four years will be:

CFA* = EBIT + Depreciation – Taxes* – Change in NWC – Capital spending