Question

What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, g. 32.16)

Answer 1

Answer:

EBIT in year 1 = $2,050,000
Depreciation = $168,000
Increase in working capital = $91,000
Capital expenditure = $118,000
Tax rate = 35%

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

Free cash flow in year 1 = 2,050,000 * (1 - 0.35) + 168,000 - 91,000 - 118,000 = $1,291,500

Now, the free cash flows are growing at 17% per year for 4 years

• Free cash flow in year 2 = $1,291,500 * (1 + 0.17)^1 = $1,511,055
• Free cash flow in year 3 = $1,291,500 * (1 + 0.17)^2 = $1,767,934.35
• Free cash flow in year 4 = $1,291,500 * (1 + 0.17)^3 = $2,068,483.19
• Free cash flow in year 5 = $1,291,500 * (1 + 0.17)^4 = $2,420,125.33

WACC = 8.3%

• Sales in year 5 = $16,200,000
• Number of shares outstanding = 830,000
• Sales per share = $16,200,000 / 830,000 = $19.52

Let the price of stock in year 5 be P5

Price to Sales Ratio = P5 / Sales per Share
2.30 = P5 / $19.52
P5 = $44.90

Total market value of equity in year 5 = $44.90 * 830,000 = $37,267,000

Market value of firm in year 5 = Market value of equity + Value of debt
Market value of firm in year 5 = $37,267,000 + $14,500,000
Market value of firm in year 5 = $51,767,000

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

Value of Firm = $1,291,500/1.083^1 + $1,511,055 / 1.083^2 + $1,767,934.35/1.083^3 + $2,068,483.19/1.083^4 + $2,420,125.33/1.083^5 + $51,767,000/1.083^5
Value of Firm = $41,747,154.14

Value of Debt = $14,500,000
Value of Equity = $41,747,154.14 - $14,500,000
Value of Equity = $27,247,154.14

Number of Shares = 830,000 Shares
Price per Share = $27,247,154.14 / 830,000
Price per Share = $32.83