Franktown Motors is expected to have an EBIT of $2.2 million next year. Deprecia
ID: 2748718 • Letter: F
Question
Franktown Motors is expected to have an EBIT of $2.2 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $158,000, $92,000, and $114,000, respectively. All are expected to grow at 15 percent per year for four years. The firm currently has $12 million in debt and 750,000 shares outstanding. After year 5, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company’s WACC is 8.7 percent and the tax rate is 34 percent. What is the price per share of the company’s stock?
Franktown Motors is expected to have an EBIT of $2.2 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $158,000, $92,000, and $114,000, respectively. All are expected to grow at 15 percent per year for four years. The firm currently has $12 million in debt and 750,000 shares outstanding. After year 5, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company’s WACC is 8.7 percent and the tax rate is 34 percent. What is the price per share of the company’s stock?
Explanation / Answer
EBIT Next Year = $ 2.2 Million = $ 2,200,000
Depreciation = $ 158,000
Increase in net working capital = $92,000
Capital Spending = $ 114,000
Growth rate of EBIT, Depreciation, Inc in NWC and Capital spending = 15% for next 4 years
Current Debt = $ 12 Million
Number of Shares outstanding = 750,000
Constant growth rate after 4 years = 2.5%
WACC = 8.7%
Tax rate = 34%
Year 1 2 3 4 5 6 EBIT 2200000.00 2530000.00 2909500.00 3345925.00 3847813.75 4424985.81 Less Tax @ 34% 748000 860200 989230 1137614.5 1308256.68 1504495.18 Net Cash Flow 1452000.00 1669800.00 1920270.00 2208310.50 2539557.08 2920490.64 Depreciation 158000 181700 208955 240298.25 276342.988 317794.436 Inc in NWC 92000 105800 121670 139920.5 160908.575 185044.861 Capital Spending 114000 131100 150765 173379.75 199386.713 229294.719 Free Cash Flow 1404000.00 1614600.00 1856790.00 2135308.50 2455604.78 2823945.49 Discount factor = 1/1.087^year 0.9199632 0.84633229 0.77859456 0.71627835 0.65894972 Discounted Flow 1291628.3 1366488.12 1445686.6 1529475.25 1618120.09 Free Cash flow = EBIT (1-Tax Rate) + Depreciation - Increase in Net working capital - Capital Spending Calculation of Present value of Cash flows for 5 years = Sum of (Free Cash Flow/(1+WACC)^n) Present value = 1404000/1.0870 + 1614600/1.087^2 + 1856790/1.087^3 + 2135308.50/1.087^4 + 2455604.78/1.087^5 = 1291628.30 + 1366488.12+1445686.60+1529475.25+1618120.09 7251398.4 Free Cash flow in 6th year 2823945.49 WACC 8.70% Constant growth rate 2.50% Present Value of constant flows 6th year onwards at the end of 5th year = Free Cash Flow in 6th year /(WACC-growth rate = 2823945.49/(0.087-0.025) 45547507.9 Present value of constant flows now = Present value of constant cash flows from above / 1.087^5 = 45547507.90/1.087^5 30013517.72 Total Present Value = Present value of cash flows from year 1 to 5 + Present Value of constant cash flows = 7251398.40+30013517.70= 37264916.1 Net Present Value of equity cash flows = Present Value of Cash flows - Total Debt = 37264916.10 - 12000000 = 25264916.1 Number of outstanding shares = 750000 Current Share Price = Total Present Value of Cash Flows / 750000 33.6865548 or 33.69Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.