Question

Problem 12-26 Adjusted Cash Flow From Assets [LO3] You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3,170,000 this year. Depreciation, the increase in net working capital, and capital spending were $241,000, $106,000, and $495,000, respectively. You expect that over the next five years, EBIT will grow at 15 percent per year, depreciation and capital spending will grow at 20 per year, and NWC will grow at 10 per year. The company currently has $18,300,000 in debt and 380,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company's WACC is 8.9 percent and the tax rate is 35 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

Answer 1

SR No	Years	1	2	3	4	5
1	EBIT	$3,170,000.00	$3,645,500.00	$4,192,325.00	$4,821,174.00	$5,544,350.00
2	Less Tax@35%	$1,109,500.00	$1,275,925.00	$1,467,313.75	$1,687,410.90	$1,940,522.50
3	Net Income(1-2)	$2,060,500.00	$2,369,575.00	$2,725,011.25	$3,133,763.10	$3,603,827.50
4	Add Depreciation	$241,000.00	$289,200.00	$347,040.00	$416,448.00	$499,737.60
5	Less increase of W/C	$106,000.00	$116,600.00	$128,260.00	$141,086.00	$155,194.60
6	OCF(3+4-5)	$2,195,500.00	$2,542,175.00	$2,943,791.25	$3,409,125.10	$3,948,370.50
7	Capital Spending	$495,000	$594,000	$712,800	$855,360	$1,026,432
8	FCFF (6-7)	$1,700,500	$1,948,175	$2,230,991	$2,553,765	$2,921,939
	PV of [email protected]%	(FCFF/1.089)=$1,561,524	$1,642,753	$1,727,485	$1,815,806	$1,907,795
	NPV = sum of all PV	$8,655,363......(1)

you have make square of 1.089 for 2nd year and cube for 3rd year and so on.

Expected cash flow at Year 6 (1907795*1.03)	$1,965,028.70
Value of the firm at the year 5 ...................(2) 1,965,028.70/(0.089-0.03)	33305571.1
Value of (2) as on today ..........................................(3) (33305571.1/1.089^5)	21745904.99
So value of the firm = (1) + (3)	$30,401,268
Value of equity =	$12,101,268
Price per share =	$31.85