Question

Pearl Corp. is expected to have an EBIT of $3,000,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $135,000, and $175,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $15,500,000 in debt and 1,350,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.6 percent and the tax rate is 22 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

Net Income = EBIT x (1-tax)

Net Income = $3,000,000 x (1-0.22)

Net Income = 2,340,000

Free Cashflow Year 1

Net Income	$       23,40,000
Add- Depreciaiton	$          1,60,000
Less- Increase in Working Capital	$          1,35,000
Less- Capital Spending	$          1,75,000
Free cashflow for Year 1	$       21,90,000

Year		Amount	PV @8.6%
1	FCFF-1	$         21,90,000	$     20,16,574.59
2	FCFF-2	$     26,28,000.0 (2190000 x 1.20)	$     22,28,259.21
3	FCFF-3	$     31,53,600.0 (2628000 x 1.20)	$     24,62,164.87
4	FCFF-4	$     37,84,320.0 (3153500 x 1.20)	$     27,20,624.17
5	FCFF-5	$     45,41,184.0 (3784320 x 1.20)	$     30,06,214.55
5	Terminal value at yerar 5	$ 9,21,59,322.4 {4541184 x 1.035 / (0.086 - 0.035)}	$ 6,10,08,471.80
Value of company			$ 7,34,42,309.19

Value of equity = value of company -value of debt

Value of equity = 73,442,309- 15,500,000

Value of equity = 57,942,309

per share value = value of equity / no of shares outstanding = 57,942,309 / 1,350,000

Per share value = $42.92 per share

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