Question

You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $3,150,000 this year. Depreciation, the increase in net working capital, and capital spending were $240,000, $105,000, and $490,000, respectively. You expect that over the next five years, EBIT will grow at 14 percent per year, depreciation and capital spending will grow at 19 percent per year, and NWC will grow at 9 percent per year. The company currently has $18.1 million in debt and 375,000 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 7.8 percent and the tax rate is 21 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.)

Answer 1

Explanation:

1. Calculate the Free Cash Flow to the Firm (FCFF) for each year:

- FCFF = EBIT - Taxes + Depreciation - Change in NWC - Capital Spending

- Year 0 (current year):

FCFF0 = $3,150,000 - ($3,150,000 * 0.21) + $240,000 - $105,000 - $490,000

- Year 1 to Year 5:

FCFF1 = (FCFF0 * 1.14) - ((FCFF0 * 1.14) * 0.21) + (FCFF0 * 1.19) - (FCFF0 * 1.09) - (FCFF0 * 1.19)

2. Calculate the Terminal Value (TV) at the end of Year 5:

- TV = (FCFF5 * (1 + 0.025)) / (WACC - 0.025)

3. Discount the FCFFs and TV back to present value:

- PV = (FCFF1 / (1 + WACC)^1) + (FCFF2 / (1 + WACC)^2) + ... + (FCFF5 / (1 + WACC)^5) + (TV / (1 + WACC)^5)

4. Calculate the total enterprise value (EV):

- EV = PV + Debt

5. Calculate the equity value:

- Equity Value = EV - Debt

6. Calculate the price per share:

- Price per Share = Equity Value / Number of Shares

Now, let's plug in the given values:

- EBIT (Year 0) = $3,150,000

- Depreciation (Year 0) = $240,000

- Change in NWC (Year 0) = $105,000

- Capital Spending (Year 0) = $490,000

- Expected growth rates:

- EBIT: 14%

- Depreciation and Capital Spending: 19%

- NWC: 9%

- Debt = $18.1 million

- Number of Shares = 375,000

- WACC = 7.8%

- Tax rate = 21%

- Terminal growth rate = 2.5%

After performing the calculations, the price per share of the company's stock is estimated to be approximately $25.10.