Question

Franktown Motors is expected to have an EBIT of $687,400 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $48,000, $7,000, and $42,000, respectively. All cash flow items are expected to grow at 6 percent per year for four years. After Year 5, the CFA* is expected to grow at 2.1 percent indefinitely. The company currently has $3.2 million in debt and 250,000 shares outstanding. The company's WACC is 9.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock? Do not use excel.

Answer 1

Cash Flow from Assets(CFA) = EBIT*(1-Tax rate) +Depreciation - Change in Net Working Capital - Net Capital Spending

CFA = $687,400*(1-0.21) + $48,000 - $7,000 - $42,000

CFA = $542,046

Growth rate of CFA for the next 4 years(g) = 6%

Growth rate of CFA therafter(g1) = 2.1%indefinitely

WACC = 9.9%

Calculating the Enterprise Value (EV):-

EV = 522,810.52 + 504,257.64+486,363.15+469,103.68+5,157,721.63

EV = $7,140,256.62

- Enterprise Value = Market Value of equity + Market Value of Debt

$7,140,256.62 = Market Value of equity + $3,200,000

Market Value of equity= $3940,256.62

- Intrinsic Price per share = Market Value of equity/No of shares outstanding

= $3940,256.62/250,000

Intrinsic Price per share = $15.76

So, the price per share of the company's stock is $15.76

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