Ward Corp. is expected to have an EBIT of $2,550,000 next year. Depreciation, th

Question

Ward Corp. is expected to have an EBIT of $2,550,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $178,000, $111,000, and $128,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $19,500,000 in debt and 830,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,200,000 and the appropriate pricesales ratio is 2.4. The company’s WACC is 9.3 percent and the tax rate is 35 percent.

What is the price per share of the company's stock?

Ward Corp. is expected to have an EBIT of $2,550,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $178,000, $111,000, and $128,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $19,500,000 in debt and 830,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,200,000 and the appropriate pricesales ratio is 2.4. The company’s WACC is 9.3 percent and the tax rate is 35 percent.

Explanation / Answer

Price to sales ratio is 2.4

Market capital/Sales = 2.4

Market Capital = 2.4 * Sales = 2.4 * 17,200,000= 41,280,000

Number of shares = 830,000. Assuming no new shares are issued,

Price per share at year 5 = 41,280,000/830,000 = $43.7349

Price per share today = $43.7349/(1+0.093)^5 where 0.093 is the WACC given.

Price per share today = $31.88

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