2. You have looked at the current financial statements for Reigle Homes, Co. The

Question

2. You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3,070,000 this year. Depreciation, the increase in net working capital, and capital spending were $236,000, $101,000, and $470,000, respectively. You expect that over the next five years, EBIT will grow at 17 percent per year, depreciation and capital spending will grow at 22 per year, and NWC will grow at 12 per year. The company currently has $17,300,000 in debt and 355,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company's WACC is 8.9 percent and the tax rate is 40 percent What is the price per share of the company's stock? Share price $ 8. Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.8 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .57, a cost of equity of 13.2 percent, and an aftertax cost of debt of 5.1 percent The cost-saving proposal is somewhat riskier than the usual project the firm undertakes, management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects Calculate the WACC WACC What is the maximum cost the company would be willing to pay for this project? Present value $ 0 10. Ward Corp. is expected to have an EBIT of $2,300,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $173,000, $101,000, and $123,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has $17,000,000 in debt and 830,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.0 percent indefinitely. The company's WACC is 8.8 percent and the tax rate is 40 percent What is the price per share of the company's stocK? Share price $

Explanation / Answer

2) REIGLE HOMES: 0 1 2 3 4 5 EBIT 3070000 3591900 4202523 4916952 5752834 6730815 Tax at 40% 1228000 1436760 1681009 1966781 2301133 2692326 NOPAT 1842000 2155140 2521514 2950171 3451700 4038489 Depreciation 236000 287920 351262 428540 522819 637839 OCF 2078000 2443060 2872776.2 3378711 3974519 4676328 Increase in NWC 101000 113120 126694 141898 158925 177997 Capital spending 470000 573400 699548 853449 1041207 1270273 Cash flow from assets 1507000 1756540 2046534 2383365 2774386 3228059 PVIF at 8.9% 0.91827 0.84323 0.77431 0.71103 0.65292 PV at 8.9% 1612984 1725692 1845470 1972675 2107667 Sum of PVs of years 1 to 5 = 9264488 Continuing value of CFFA at t5 = 3228059*1.035/(0.089-0.035) = 61871131 PV of continuing value = 61871131*0.65292= 40396957 Value of the firm 49661445 Less: Value of debt 17300000 Value of equity 32361445 # of shares outstanding 355000 Price per share $              91.16 8) HANKINS: WACC of the firm = 13.2*1/1.57+5.1*0.57/1.57 = 10.26% Risk adjusted discount rate for the project = 10.26+3.00 = 13.26% PV of after tax perpetual cash savings growing at 3% = 5800000*1.03/(0.1326-0.03) = $   58,226,121 MAXIMUM COST THE COMPANY WOULD BE WILLING TO PAY FOR THE PROJECT (WHICH GIVES 0 NPV) = $   58,226,121 10) WARD CORP: 1 2 3 4 5 EBIT 2300000 2668000 3094880 3590061 4164471 Tax at 40% 920000 1067200 1237952 1436024 1665788 NOPAT 1380000 1600800 1856928 2154036 2498682 Depreciation 173000 200680 232789 270035 313241 OCF 1553000 1801480 2089717 2424071 2811923 Increase in NWC 101000 117160 135906 157650 182875 Capital spending 123000 142680 165509 191990 222709 Cash flow from assets 1329000 1541640 1788302 2074431 2406340 PVIF at 8.8% 0.91912 0.84478 0.77645 0.71365 0.65593 PV at 8.8% 1221507 1302342 1388527 1480415 1578383 Sum of PVs of years 1 to 5 = 6971174 Continuing value of CFFA at t5 = 2406340*1.03/(0.088-0.03) = 42733279 PV of continuing value = 42733279*0.65593 = 28029913 Value of the firm 35001087 Less: Value of debt 17000000 Value of equity 18001087 # of shares outstanding 830000 Price per share $              21.69

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