Question

Sora Industries has 66 million outstanding shares, $121 million in debt, $59 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			8.08%	10.26%	6.01%	4.99%
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	62.1	65.1
Less: Income Tax at 40%			(21.5)	(23.8)	(24.8)	(26.0)
Plus: Depreciation			7.0	7.5	9.0	9.5
Less: Capital Expenditures			(7.7)	(10.0)	(9.9)	(10.4)
Less: Increases in NWC			(6.3)	(8.6)	(5.6)	(4.9)
Free Cash Flow			25.3	24.7	30.8	33.3

A. Suppose Sora's revenue free cash flow are expected to grow at a 3.3% rate beyond year 4. If Sora's weighted average cost of capital is 14.0%, what is the value of Sora's stock based on this information?

1. $2.82
2. $3.09
3. $3.18
4. $5.07
5. None of the above

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?

1. $87
2. $3.09
3. $18
4. $3.75
5. None of the above

C. Let's return to the assumptions of part (a) and suppose Sora can maintain its costs of goods sold at 67% of sales. However, now suppose Sora 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.)

1. $4.42
2. $4.79
3. $4.93
4. $6.82
5. None of the above

D. Sora's net working capital needs were estimated to be 18% of sales (which is their current level in year 0). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions remain as in part (a), what stock price do you estimate for Sora?

1. $2.53
2. $3.01
3. $4.67
4. $5.89
5. None of the above

Answer 1

A)	Value of Sora's Stock
	Free cash flows at year 4			33.3
	Growth rate (g)			0.033
	Weighted avg cost of capital(ke)			0.14
	Present values of future cash flows = Free cash Flows (1+growth rate)/Weighted avg Cost of capital (ke) - Growth rate(g)
			=	321.485	millions
	No. of outstanding Shares			66	millions
	Value of Sora's Stock =			4.871
	Answer : Option None of the above

B)	Estimate of Stock's value change
	Year	1	2	3	4
	Sales	468	516	547	574.3
	COGS(70%)	327.6	361.2	382.9	402.01
	Gross Profit	140.4	154.8	164.1	172.29
	Selling, General & Admin	-93.6	-103.2	-109.4	-114.86
	Depreciation	-7	-7.5	-9	-9.5
	EBIT	39.8	44.1	45.7	47.93
	Income Tax(40%)	-15.92	-17.64	-18.28	-19.172
	Depreciation	7	7.5	9	9.5
	Capital Exp	-7.7	-10	-9.9	-10.4
	Increase in NWC	-6.3	-8.6	-5.6	-4.9
	Free Cash Flow	16.88	15.36	20.92	22.958
	Present values of future cash flows = Free cash Flows (1+growth rate)/Weighted avg Cost of capital (ke) - Growth rate(g)
				221.6413	millions
	Value of Sora's Stock =		3.358

C)
	Year	1	2	3	4
	Sales	468.00	516.00	547.00	574.30
	COGS(67%)	313.56	345.72	366.49	384.78
	Gross Profit	154.44	170.28	180.51	189.52
	Selling, General & Admin	(74.88)	(82.56)	(87.52)	(91.89)
	Depreciation	(7.00)	(7.50)	(9.00)	(9.50)
	EBIT	72.56	80.22	83.99	88.13
	Income Tax(40%)	(29.02)	(32.09)	(33.60)	(35.25)
	Depreciation	7.00	7.50	9.00	9.50
	Capital Exp	(7.70)	(10.00)	(9.90)	(10.40)
	Increase in NWC	(6.30)	(8.60)	(5.60)	(4.90)
	Free Cash Flow	36.54	37.03	43.89	47.08
	Present values of future cash flows = Free cash Flows (1+growth rate)/Weighted avg Cost of capital (ke) - Growth rate(g)
				454.5065	millions
	Value of Sora's Stock =		6.89

D)
	Year	1	2	3	4
	Sales	468.00	516.00	547.00	574.30
	COGS(67%)	313.56	345.72	366.49	384.78
	Gross Profit	154.44	170.28	180.51	189.52
	Selling, General & Admin	(93.60)	(103.20)	(109.40)	(114.86)
	Depreciation	(7.00)	(7.50)	(9.00)	(9.50)
	EBIT	53.84	59.58	62.11	65.16
	Income Tax(40%)	(21.54)	(23.83)	(24.84)	(26.06)
	Depreciation	7.00	7.50	9.00	9.50
	Capital Exp	(7.70)	(10.00)	(9.90)	(10.40)
	Increase in NWC	(4.20)	(5.73)	(3.73)	(3.27)
	Free Cash Flow	27.40	27.51	32.63	34.93
	Present values of future cash flows = Free cash Flows (1+growth rate)/Weighted avg Cost of capital (ke) - Growth rate(g)
				337.2092	millions
	Value of Sora's Stock =		5.11