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Homework answers / question archive / Pearl Corp is expected to have an EBIT of $3,800,000 next year
Pearl Corp is expected to have an EBIT of $3,800,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $175,000, and $215,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $19,500,000 'in debt and 1,750,000 shares outstanding. At Year 5. you believe that the company's sales will be $31,240,000 and the appropriate price-sales ratio is 3.1. The company's WACC is 8.8 percent and the tax rate is 25 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price
FCFF or free cash flow to Firm = EBIT*(1-tax rate)+ Depreciation-Increase in NWC-Capital Spending
Expected FCFF for next year, FCFF1 = $3,800,000*(1-0.25) + $160,000-$175,000-$215,000
=> FCFF1 =$2,620,000
Growth rate for next 4 year = 19%
hence FCFF will grow at 19% for next 4 year
FCFF year 2, FCFF2= FCFF1*(1+0.19) = $2,620,000*1.19 = $3,117,800
FCFF for year 3, FCFF3 = FCFF2*(1+0.19)=$3,117,800*1.19 = $3,710,182
FCFF for Year4, FCFF4=FCFF3*(1+0.19)= $3,710,182*1.19 = $4,415,117
FCFF for year 5, FCFF5 = FCFF4*(1+0.19)= $4,415,117*1.19=$5,253,989
At year end 5, the sales will be $31,240,000
Price to sales ratio = Horizontal or Terminal value of the firm / Sales
=>3.1 = Horizontal or Terminal value of the firm / $31,240,000
=> Horizontal or Terminal value of the firm= $31,240,000*3.10
=>Horizontal or Terminal value of the firm at year 5 end = $96,844,000
Value of the Firm = Present value of the FCFF + Present vale of the terminal value
Present value = Future value *PVF
PVF or Present value factor = 1/(1+i)^t
i = WACC = 8.8% or 0.088
t = time period
Value of the Equity = Value of the Firm - Value of the debt
=>Value of the Equity =$78,042,376-$19,500,000
=>Value of the Equity =$58,542,376
Price per share = Value of equity / Number of shares Outstanding
=>Price per share =$58,542,376 / 1,750,000= $33.45
Share price= $33.45
please see the atteched file for the complete solution
