In: Finance
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
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
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
Number of shares = 335,000
Price per share = $27,193,525.30 / 335,000 = $81.17