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Pearl Corp. is expected to have an EBIT of $2,600,000 next year. Depreciation, the increase in...

Pearl Corp. is expected to have an EBIT of $2,600,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $115,000, and $155,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has $13,500,000 in debt and 1,150,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company’s WACC is 9.2 percent and the tax rate is 23 percent.

What is the price per share.

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Expert Solution

FCF = EBIT*(1-tax rate)+dep-increase in net working capita-capital spending

=2600000*(1-0.23)+160000-115000-155000=1892000

WACC= 9.20%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 1892000 1892000 1.092 1732600.733
2 1892000 16.00% 2194720 2194720 1.192 1841208.054
3 2194720 16.00% 2545875.2 2545875.2 1.302 1955357.296
4 2545875.2 16.00% 2953215.232 2953215.232 1.422 2076803.961
5 2953215.232 16.00% 3425729.669 56911315.47 60337045.14 1.553 38851928.62
Long term growth rate (given)= 3.00% Value of Enterprise = Sum of discounted value = 46457898.66
Where
Current FCF = Previous year FCF*(1+growth rate)^corresponding year
Unless FCF for the year provided
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor= (1+ WACC)^corresponding period
Discounted value= total value/discount factor
Enterprise value = Equity value+ MV of debt
46457898.66 = equity value+13500000
Equity value = 32957898.66
share price = equity value/number of shares
share price = 32957898.66/1150000
share price = 28.66


jeff jeffy answered 1 year ago
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