Sora Industries has 63 million outstanding shares, $126 million in debt, $48 million in cash, and...

Sora Industries has 63 million outstanding shares, $126 million in debt, $48 million in cash, and the following projected free cash flow for the next four years:

		Year	0	1	2	3	4
Earnings and FCF Forecast ($ million)
1	Sales		433.0	468.0	516.0	547.0	574.3
2	Growth vs. Prior Year			8.1%	10.3%	6.0%	5.0%
3	Cost of Goods Sold			(313.6)	(345.7)	(366.5)	(384.8)
4	Gross Profit			154.4	170.3	180.5	189.5
5	Selling, General, & Admin.			(93.6)	(103.2)	(109.4)	(114.9)
6	Depreciation			(7.0)	(7.5)	(9.0)	(9.5)
7	EBIT			53.8	59.6	62.1	65.2
8	Less: Income Tax at 40%			(21.5)	(23.8)	(24.8)	(26.1)
9	Plus: Depreciation			7.0	7.5	9.0	9.5
10	Less: Capital Expenditures			(7.7)	(10.0)	(9.9)	(10.4)
11	Less: Increase in NWC			(6.3)	(8.6)	(5.6)	(4.9)
12	Free Cash Flow			25.3	24.6	30.8	33.3

a. Suppose Sora's revenue and free cash flow are expected to grow at a 3.3% rate beyond year four. If Sora's weighted average cost of capital is 9.0%, what is the value of Sora stock based on this information?

b. Sora's cost of goods sold was assumed to be 67% of sales. If its cost of goods sold is actually 70% of sales, how would the estimate of the stock's value change?

c. Return to the assumptions of part (a) and suppose Sora can maintain its cost of goods sold at 67% of sales. However, the firm reduces its selling, general, and administrative expenses from 20% of sales to 16% of sales. What stock price would you estimate now? (Assume no other expenses, except taxes, are affected.)

d. Sora's net working capital needs were estimated to be 18% of sales (their current level in year zero). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions are as in (a), what stock price do you estimate for Sora? (Hint: This change will have the largest impact on Sora's free cash flow in year 1.)

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Expert Solution

Ans a.
Sora Industries	Amt $Million

Year	Year 1	Year 2	Year 3	Year 4
Free cash flow	25.3	24.6	30.8	33.3
Terminal value of FCF at Yr 4 end with growth rate =g=3.3% , WACC=9%=33.3*1.033/(9%-3.3%)=601.74				601.74
Total Free cash flow & Terminal Value of FCF =	25.30	24.60	30.80	635.04
PV factor @9%=1/1.09^n	0.9174	0.8417	0.7722	0.7084
PV of FCF +Terminal value	23.21	20.71	23.78	449.86

Enterprise value =Sum of PV of FCF+term Value	517.560
Less Debt	(126.000)
Add : Cash	48.000
Value of Equity	439.560
No of outstanding shares in Millions	63.00
Stock Value =439.560/63=	$ 6.98

Ans b.

Amt $Million

Year	Year 1	Year 2	Year 3	Year 4
Sales	468.00	516.00	547.00	574.30
COGS @70%	(327.60)	(361.20)	(382.90)	(402.01)
Gross Profit	140.40	154.80	164.10	172.29
SGA expenses	(93.60)	(103.20)	(109.40)	(114.90)
Depreciation	(7.00)	(7.50)	(9.00)	(9.50)
EBIT	39.80	44.10	45.70	47.89
Less Income Tax @40%	(15.92)	(17.64)	(18.28)	(19.16)
Plus Depreciation	7.00	7.50	9.00	9.50
Less : Capital Expenditure	(7.70)	(10.00)	(9.90)	(10.40)
Less : Increase in NWC	(6.30)	(8.60)	(5.60)	(4.90)
Free Cash flow	16.88	15.36	20.92	22.93
Terminal value of FCF at Yr 4 end with growth rate =g=3.3% , WACC=9%=22.93*1.033/(9%-3.3%)				415.63
Total Free cash flow & Terminal Value of FCF =	16.88	15.36	20.92	438.56
PV factor @9%=1/1.09^n	0.9174	0.8417	0.7722	0.7084
PV of FCF +Terminal value	15.49	12.93	16.15	310.68

Enterprise value =Sum of PV of FCF+term Value	355.25
Less Debt	(126.000)
Add : Cash	48.000
Value of Equity	277.246
No of outstanding shares in Millions	63.00
Stock Value =277.246/63=	$ 4.40

Ans c

Amt $ Million

Year	Year 1	Year 2	Year 3	Year 4
Sales	468.00	516.00	547.00	574.30
COGS @67%	(313.6)	(345.7)	(366.5)	(384.8)
Gross Profit	154.44	170.28	180.51	189.52
SGA expenses	(74.9)	(82.6)	(87.5)	(91.9)
Depreciation	(7.00)	(7.50)	(9.00)	(9.50)
EBIT	72.56	80.22	83.99	88.13
Less Income Tax @40%	(29.02)	(32.09)	(33.60)	(35.25)
Plus Depreciation	7.00	7.50	9.00	9.50
Less : Capital Expenditure	(7.70)	(10.00)	(9.90)	(10.40)
Less : Increase in NWC	(6.30)	(8.60)	(5.60)	(4.90)
Free Cash flow	36.54	37.03	43.89	47.08
Terminal value of FCF at Yr 4 end with growth rate =g=3.3% , WACC=9%=47.08*1.033/(9%-3.3%)				853.20
Total Free cash flow & Terminal Value of FCF =	36.54	37.03	43.89	900.27
PV factor @9%=1/1.09^n	0.9174	0.8417	0.7722	0.7084
PV of FCF +Terminal value	33.52	31.17 jeff jeffy answered 1 year ago Next > < Previous Related Solutions Sora Industries has 63 million outstanding shares, $123 million in debt, $59 million in cash, and... Sora Industries has 63 million outstanding shares, $123 million in debt, $59 million in cash, and the following projected free cash flow for the next four years: Year 0 1 2 3 4 Earnings and FCF Forecast ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 3 Cost of Goods Sold (313.6) (345.7) (366.5) (384.8) 4 Gross Profit 154.4 170.3 180.5 189.5 5 Selling, General, & Admin. (93.6) (103.2) (109.4) (114.9)... Sora Industries has 63 million outstanding shares, $ 125 million in debt, $50 million in cash,... 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Sora Industries has 63 million outstanding​ shares, $126 million in​ debt, $48 million in​ cash, and...

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Sora Industries has 63 million outstanding shares, $126 million in debt, $48 million in cash, and...