Question

Dewey Corp. is expected to have an EBIT of $3,350,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $270,000, $175,000, and $275,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $22,000,000 in debt and 885,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.7 percent indefinitely. The company’s WACC is 9.1 percent and the tax rate is 23 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

Ans.

FCF1 = [EBIT * (1 - t)] + Depreciation - Capital Spending - Increase in NWC

= $ 3,350,000 * ( 1 - 0.23) + $ 270,000 - $ 275,000 - $ 175,000  

= $ 2,399,500

Firm Value = [FCF1 / (1 + WACC)] + [{FCF1 * (1 + g1)} / (1 + WACC)2] + [{FCF1 * (1 + g1)2} / (1 + WACC)3] + [{FCF1 * (1 + g1)3} / (1 + WACC)4] + [{FCF1 * (1 + g1)4} / (1 + WACC)5] + [{FCF1 * (1 + g1)4 * (1 + gC)} / {(WACC - gC) * (1 + WACC)5}]

Particulars	1	2	3	4	5	Total
FCF	$ 2,399,500.00	$ 2,879,400.00	$ 3,455,280.00	$ 4,146,336.00	$     4,975,603.20
Terminal Value					$ 79,842,882.60
Total	$ 2,399,500.00	$ 2,879,400.00	$ 3,455,280.00	$ 4,146,336.00	$ 84,818,485.80
Present value factor @ 9.1%	0.916590284	0.840137749	0.770062098	0.705831437	0.646958238
Present Value	$ 2,199,358.39	$ 2,419,092.63	$ 2,660,780.17	$ 2,926,614.30	$ 54,874,018.09	$ 65,079,863.58

Showing Formulas applied

Particulars	1	2	3	4	5	Total
FCF	2399500	=+B2*1.2	=+C2*1.2	=+D2*1.2	=+E2*1.2
Terminal Value					=(+F2*1.027)/0.091 - 0.027
Total	=SUM(B2:B3)	=SUM(C2:C3)	=SUM(D2:D3)	=SUM(E2:E3)	=SUM(F2:F3)
Present value factor @ 9.1%	=1/1.091	=+B5/1.091	=+C5/1.091	=+D5/1.091	=+E5/1.091
Present Value	=+B4*B5	=+C4*C5	=+D4*D5	=+E4*E5	=+F4*F5	=SUM(B6:F6)

Equity Value = Firm Value - Value of debt

Equity Value =  $65,079,863.58 - $22,000,000 = $43,079,863.58

Share Price = Equity Value / No. of shares outstanding

Share Price = $ 43,079,863.58 / 885,000 shares = $ 48.67781

Share Price = $ 48.68