Ward Corp is expected to have an EBIT of 2300000 next year D

Ward Corp. is expected to have an EBIT of $2,300,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $173,000, $101,000, and $123,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has S 830,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company\'s WACC is 8.8 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 final answer to 2 decimal places, e.g., 32.16.)

Solution

Year 1 Year 2 Year 3 Year 4 Year 5 EBIT (16% increase for Four Year) $2,300,000.00 $2,668,000.00 $3,094,880.00 $3,590,060.80 $4,164,470.53 Depreciation $173,000.00 $200,680.00 $232,788.80 $270,035.01 $313,240.61 Taxes @ 40% $920,000.00 $1,067,200.00 $1,237,952.00 $1,436,024.32 $1,665,788.21 Change in NWC $101,000.00 $117,160.00 $135,905.60 $157,650.50 $182,874.58 Capital spending $123,000.00 $142,680.00 $165,508.80 $191,990.21 $222,708.64 CFA = EBIT + Depreciation – Taxes – Change in NWC – Capital spending $1,329,000.00 $1,541,640.00 $1,788,302.40 $2,074,430.78 $2,406,339.71 The terminal value of the company in Year 5 will be the Year 5 sales times the price–sales ratio Terminal value 5=$2406339.71 x 1.03/(8.8% - 3%) $42,733,274.15 Year 1 2 3 4 5 Cash flow $1,329,000.00 $1,541,640.00 $1,788,302.40 $2,074,430.78 $45,139,613.86 PV @ 8.8% 0.9191 0.8448 0.7764 0.7136 0.6559 Present Value $1,221,507.35 $1,302,342.40 $1,388,526.82 $1,480,414.63 $29,608,292.52 Value of firm $35,001,083.72 Equity value = Value of firm - debt Equity value = $35,001,083.72 - $17,000,000 $18,001,083.72 Share price = $18,001,083.72/ 830,000 $21.69