Question

what is the formula for: and is there a short way to do this: Adjusted Cash Flow from Assets [LO3] Ward Corp. is expected to have an EBIT of $1.9 million next year. Depreciation, the increase in net working capital, and cap- ital 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 million in debt and 800,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company’s WACC is 8.5 percent and the tax rate is 35 percent. What is the price per share of the company’s stock?

Answer 1

Next Year:

EBIT = $1,900,000
Depreciation = $165,000
Change in NWC = $85,000
Capital Spending = $115,000
Tax rate = 35%

FCF1 = EBIT*(1-tax) + Depreciation - Change in NWC - Capital Spending
FCF1 = $1,900,000*(1-0.35) + $165,000 - $85,000 - $115,000
FCF1 = $1,200,000

Growth rate for next four years is 18% and constant growth rate (g) of 3% thereafter

FCF2 = $1,200,000*1.18 = $1,416,000
FCF3 = $1,416,000*1.18 = $1,670,880
FCF4 = $1,670,880*1.18 = $1,971,638
FCF5 = $1,971,638*1.18 = $2,326,533
FCF6 = $2,326,533*1.03 = $2,396,329

WACC = 8.50%

Value of Firm at the end of Year 5, V5 = FCF6 / (WACC - g)
Value of Firm at the end of Year 5, V5 = $2,396,329 / (0.0850 - 0.03)
Value of Firm at the end of Year 5, V5 = $435,699,618

Value of Firm = $1,200,000/1.085 + $1,416,000/1.085^2 + $1,670,880/1.085^3 + $1,971,638/1.085^4 + $2,326,533/1.085^5 + $435,699,618/1.085^5
Value of Firm = $296,346,935

Value of Debt = $13,000,000

Value of Equity = Value of Firm - Value of Debt
Value of Equity = $296,346,935 - $13,000,000
Value of Equity = $270,346,935

Number of shares outstanding = 800,000

Price per share = Value of Equity / Number of shares outstanding
Price per share = $270,346,935 / 800,000
Price per share = $337.93

So, price per share of firm is $337.93