Franktown Motors is expected to have an EBIT of $2.2 million next year. Deprecia

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?

$29.34 $27.82 $16.47 $22.07 $26.12

Explanation / Answer

Adjusted cash flow is calculated as

Adjusted Cash flow = EBIT - Depreciation - Increase in net working capital - Capital Spending

Terminal value is calculated as 3211175.48 * (1+2.5%) / (8.7% - 2.5%)

Present value is calculated as Cash flow / (1+r)n

Value of the company = Sum of all cash flows

Value of the company = 34,005,000

Value of equity = value of the company - value of debt =  34,005,000 - 12,000,000 = 22,005,000

Price of the share = 22,005,000 / 750000 = $29.34

Year EBIT Depreciation Increase in NWC Capital Spending Free Cash Flow After tax cash flow PV 1        2,200,000.00    158,000.00              92,000.00        114,000.00      1,836,000.00        1,211,760.00        1,114,774.61 2        2,530,000.00    181,700.00            105,800.00        131,100.00      2,111,400.00        1,393,524.00        1,179,384.36 3        2,909,500.00    208,955.00            121,670.00        150,765.00      2,428,110.00        1,602,552.60        1,247,738.74 4        3,345,925.00    240,298.25            139,920.50        173,379.75      2,792,326.50        1,842,935.49        1,320,054.79 5        3,847,813.75    276,342.99            160,908.58        199,386.71      3,211,175.48        2,119,375.81        1,396,562.10 Terminal    53,087,981.64      35,038,067.88      23,088,325.12

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