Question
In: Finance
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.)
Solutions
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 2 years agoRelated SolutionsSora 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,...Sora Industries has 63 million outstanding shares, $ 125
million in debt, $50 million in cash, and the following projected
free cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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)...
Sora Industries has 63 million outstanding? shares, $125 million in? debt, $44 million in? cash, and...Sora Industries has 63 million outstanding? shares, $125 million
in? debt, $44 million in? cash, and the following projected free
cash flow for the next four? years:
Year
0
1
2
3
4
Earnings and FCF Forecast? ($ 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 70 million outstanding shares, $124 million in debt, $48 million in cash, and...Sora Industries has 70 million outstanding shares, $124 million
in debt, $48 million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Copy to Clipboard
+
Open in Excel
+
Earnings and FCF Forecast ($ 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...
Sora Industries has 63 million outstanding shares, $ 130 million in debt, $ 56 million in...Sora Industries has 63 million outstanding shares, $ 130 million
in debt, $ 56 million in cash, and the following projected free
cash flow for the next four years LOADING... : a. Suppose Sora's
revenue and free cash flow are expected to grow at a 4.9 % rate
beyond year 4. If Sora's weighted average cost of capital is 10.0 %
, what is the value of Sora's stock based on this information? b.
Sora's cost of goods sold was...
Sora Industries has 60 million outstanding shares, $122million in debt, $53 million in cash, and the...Sora Industries has 60 million outstanding shares, $122million
in debt, $53 million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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...
Sora Industries has 66 million outstanding shares, $124 million in debt, $50million in cash, and the...Sora Industries has 66 million outstanding shares, $124 million
in debt, $50million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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...
Sora Industries has 65 million outstanding shares, $127 million in debt, $51 million in cash, and...Sora Industries has 65 million outstanding shares, $127 million
in debt, $51 million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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 66 million outstanding shares, $130 million in debt, $58 million in cash, and...Sora Industries has 66 million outstanding shares, $130 million
in debt, $58 million in cash, and the following projected free
cash flow for the next four years
Earnings Forecast & FCF Forecast
($millions)
Year
0
1
2
3
4
Sales
433.0
468.0
516.0
547.0
574.3
Growth V. Prior Yr
8.1%
10.3%
6.0%
5.0%
COGS
(313.6)
(345.7)
(366.5)
(384.8)
Gross Profit
154.4
170.3
180.5
189.5
Selling, General & Admin.
(93.6)
(103.2)
(109.4)
(114.9)
Depreciation
(7.0)
(7.5)
(9.0)
(9.5)
EBIT
53.8
59.6...
Sora Industries has 65 million outstanding shares,$130 million in debt, $50 million in cash, and the...Sora Industries has 65 million outstanding shares,$130 million
in debt, $50 million in cash, and the following projected free
cash flow for the next four years
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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...
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