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You have looked at the current financial statements for Reigle Homes, Co. The company has an...

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,990,000 this year. Depreciation, the increase in net working capital, and capital spending were $232,000, $97,000, and $450,000, respectively. You expect that over the next five years, EBIT will grow at 16 percent per year, depreciation and capital spending will grow at 21 per year, and NWC will grow at 11 per year. The company currently has $16,500,000 in debt and 335,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company’s WACC is 9.1 percent and the tax rate is 40 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.)

Share price

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Expert Solution

  • EBIT in year 1 = $2,990,000
  • Depreciation = $232,000
  • Increase in working capital = $97,000
  • Capital expenditure = $450,000
  • Tax rate = 40%

Free cash flow in year 1 = EBIT * (1 - tax rate) + Depreciation - Increase in working capital - Capital expenditure

= 2,990,000 * (1 - 0.40) + 232,000 - 97,000 - 450,000 = $1,479,000

Now, the free cash flows are growing at 16% per year for 4 years

  • Free cash flow in year 2 = $1,479,000 * (1 + 0.16)^1 = $1,715,640
  • Free cash flow in year 3 = $1,479,000 * (1 + 0.16)^2 = $1,990,142.40
  • Free cash flow in year 4 = $1,479,000 * (1 + 0.16)^3 = $2,786,199.36
  • Free cash flow in year 5 = $1,479,000 * (1 + 0.16)^4 = $3,231,991.26.

Now the cash flows are growing at 3% indefinitely and WACC = 9.1%

Firm value in year 5 = [3,231,991.26∗(1+0.03)]/[0.091−0.03] = $54,572,967.14

Now the current value of firm is the present value of all the cash flows

Value of firm = [1,479,000/(1+0.091)1] + [1,715,640/(1+0.091)2] + [1,990,142.40/(1+0.091)3] +

[2,786,199.36/(1+0.091)4] + [3,231,991.26/(1+0.091)5] + [54,572,967.14/(1+0.091)5]

= $43,693,525.30

  • Value of debt = $16,500,000
  • Value of equity = Value of firm - Value of debt = $27,193,525.30

Number of shares = 335,000

Price per share = $27,193,525.30 / 335,000 = $81.17

jeff jeffy answered 1 year ago
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