Question

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)
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 3.4% rate beyond year four. If​ Sora's weighted average cost of capital is 14.0%​, 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.)

Answer all parts please!

Answer 1

a)

Presen value of 4 year cash flows

Resultant table

Cash flows grow at the rate of 3.4% every year after four year

so the value of stock

value of stock after four year
	$325.12
Present value of stock
	$192
Value of entity
	$273.63
Less:Debt	($127)
Add: Cash	$51
Value of stock	$197.63

b)

If cost of goods assumed 67%, if it is actually 70% then the value of stock increase by 3%

Value of stock	$197.63
Increase by 3%	%
	$5.93
Value of stock after increase
	$203.56

c) If they reduce their expense from 20% to 16%, then the value of stock increase by 4%

Value of stock	$203.56
Increase by 4%	%
	$8.14
Value of stock after increase
	$211.17

d) if the working capita requirement reduce from 18% to 12%, then the value of stock increase by 12%

using the assuption of part a)

Value of stock	$197.63
Increase by 6%	%
	$11.86
Value of stock after increase
	$209.49