Question
In: Finance
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 | 62.1 | 65.2 | ||
| Less: Income Tax at 4% | (21.5) | (23.8) | (24.8) | (26.1) | ||
| 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 | 24.6 | 30.8 | 33.3 | ||
A.) Suppose Sora's revenue and free cash flow are expected to grow at a 3.8% rate beyond year 4. If Sora's weighted average cost of capital is 12.0%, what is the value of Sora's 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.) Let's return to the assumptions of part (a) and suppose Sora can maintain its cost 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.)
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? (Hint: This change will have the largest impact on Sora's free cash flow in year 1.)
Solutions
Expert Solution
| A.Earnings Forecast & FCF Forecast ($millions) | Year | 0 | 1 | 2 | 3 | 4 |
| Sales | 433 | 468 | 516 | 547 | 574.3 | |
| Growth V. Prior Yr | 8.10% | 10.30% | 6.00% | 5.00% | ||
| 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 | -7.5 | -9 | -9.5 | ||
| EBIT | 53.8 | 59.6 | 62.1 | 65.1 | ||
| Less: Income Tax at 4% | -21.52 | -23.84 | -24.84 | -26.04 | ||
| Plus: Depreciation | 7 | 7.5 | 9 | 9.5 | ||
| Less: Capital Expenditures | -7.7 | -10 | -9.9 | -10.4 | ||
| Less: Increases in NWC | -6.3 | -8.6 | -5.6 | -4.9 | ||
| Free Cash Flow | 25.28 | 24.66 | 30.76 | 33.3 | ||
| Terminal FCF(33.3*1.038/(12%-3.8%)) | 421.5293 | |||||
| Total FCFs | 25.28 | 24.66 | 30.76 | 454.7893 | ||
| PV F at 12%(1/1.12^Yr.n) | 0.89286 | 0.79719 | 0.71178 | 0.63552 | ||
| PV at 12% | 22.57143 | 19.65880 | 21.89436 | 289.02680 | ||
| NPV/Value of Sora | 353.15139 | |||||
| Less: Debt O/s | -130 | |||||
| Add; Cash | 58 | |||||
| Value of Sora's Equity | 281.15139 | |||||
| No.of shares o/s(in mlns.) | 66.00000 | |||||
| Per share Value of Sora's stock | 4.26 |
| B. Earnings Forecast & FCF Forecast | Year | 0 | 1 | 2 | 3 | 4 |
| Sales | 433 | 468 | 516 | 547 | 574.3 | |
| Growth V. Prior Yr | 8.10% | 10.30% | 6.00% | 5.00% | ||
| COGS (Sales*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 | -114.9 | ||
| Depreciation | -7 | -7.5 | -9 | -9.5 | ||
| EBIT | 39.8 | 44.1 | 45.7 | 47.89 | ||
| Less: Income Tax at 40% | -15.92 | -17.64 | -18.28 | -19.156 | ||
| Plus: Depreciation | 7 | 7.5 | 9 | 9.5 | ||
| Less: Capital Expenditures | -7.7 | -10 | -9.9 | -10.4 | ||
| Less: Increases in NWC | -6.3 | -8.6 | -5.6 | -4.9 | ||
| Free Cash Flow | 16.88 | 15.36 | 20.92 | 22.934 | ||
| Terminal FCF(22.934*1.038/(12%-3.8%)) | 290.31088 | |||||
| Total FCFs | 16.88 | 15.36 | 20.92 | 313.24488 | ||
| PV F at 12%(1/1.12^Yr.n) | 0.89286 | 0.79719 | 0.71178 | 0.63552 | ||
| PV at 12% | 15.07143 | 12.24490 | 14.89044 | 199.07278 | ||
| NPV/Value of Sora | 241.27955 | |||||
| Less: Debt O/s | -130 | |||||
| Add; Cash | 58 | |||||
| Value of Sora's Equity | 169.27955 | |||||
| No.of shares o/s(in mlns.) | 66.00000 | |||||
| Per share Value of Sora's stock | 2.56 |
| C.Earnings Forecast & FCF Forecast | Year | 0 | 1 | 2 | 3 | 4 |
| Sales | 433 | 468 | 516 | 547 | 574.3 | |
| Growth V. Prior Yr | 8.10% | 10.30% | 6.00% | 5.00% | ||
| COGS | -313.6 | -345.7 | -366.5 | -384.8 | ||
| Gross Profit | 154.4 | 170.3 | 180.5 | 189.5 | ||
| Selling, General & Admin.(sales*16%) | -74.88 | -82.56 | -87.52 | -91.888 | ||
| Depreciation | -7 | -7.5 | -9 | -9.5 | ||
| EBIT | 72.52 | 80.24 | 83.98 | 88.112 | ||
| Less: Income Tax at 40% | -29.008 | -32.096 | -33.592 | -35.2448 | ||
| Plus: Depreciation | 7 | 7.5 | 9 | 9.5 | ||
| Less: Capital Expenditures | -7.7 | -10 | -9.9 | -10.4 | ||
| Less: Increases in NWC | -6.3 | -8.6 | -5.6 | -4.9 | ||
| Free Cash Flow | 36.512 | 37.044 | 43.888 | 47.0672 | ||
| Terminal FCF(47.0672*1.038/(12%-3.8%)) | 595.80187 | |||||
| Total FCFs | 36.512 | 37.044 | 43.888 | 642.86907 | ||
| PV F at 12%(1/1.12^Yr.n) | 0.89286 | 0.79719 | 0.71178 | 0.63552 | ||
| PV at 12% | 32.60000 | 29.53125 | 31.23861 | 408.55492 | ||
| NPV/Value of Sora | 501.92478 | |||||
| Less: Debt O/s | -130 | |||||
| Add; Cash | 58 | |||||
| Value of Sora's Equity | 429.92478 | |||||
| No.of shares o/s(in mlns.) | 66.00000 | |||||
| Per share Value of Sora's stock | 6.51 |
| D.Earnings Forecast & FCF Forecast ($millions) | Year | 0 | 1 | 2 | 3 | 4 |
| Sales | 433 | 468 | 516 | 547 | 574.3 | |
| Growth V. Prior Yr | 8.10% | 10.30% | 6.00% | 5.00% | ||
| 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 | -7.5 | -9 | -9.5 | ||
| EBIT | 53.8 | 59.6 | 62.1 | 65.1 | ||
| Less: Income Tax at 4% | -21.5 | -23.8 | -24.8 | -26.1 | ||
| Plus: Depreciation | 7 | 7.5 | 9 | 9.5 | ||
| Less: Capital Expenditures | -7.7 | -10 | -9.9 | -10.4 | ||
| Less: Increases in NWC (12%*Change in sales) | -4.2 | -5.76 | -3.72 | -3.276 | ||
| Free Cash Flow | 27.4 | 27.54 | 32.68 | 34.824 | ||
| Terminal FCF(34.824*1.038/(12%-3.8%)) | 440.82088 | |||||
| Total FCFs | 27.4 | 27.54 | 32.68 | 475.6449 | ||
| PV F at 12%(1/1.12^Yr.n) | 0.89286 | 0.79719 |
 jeff jeffy answered 1 year agoRelated SolutionsSora 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,$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...
Sora Industries has 61 million outstanding shares, $130 million in debt, $60 million in cash, and...
Sora Industries has 61 million outstanding shares, $130 million in
debt, $60 million in cash, and the following projected free cash
flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ million)
1
Sales
433
468
516
547
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, $124 million in debt, $60 million in cash, and...Sora Industries has 66 million outstanding shares, $124 million
in debt, $60 million in cash, and the following projected free cash
flow for the next four years:
Year 0 1 2 3
4 Earning & FCF Forecast ($millions)
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%
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...
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 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 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)...
Sora Industries has 67 million outstanding shares, $128 million in debt, $55 million in cash, and...
Sora Industries has 67 million outstanding shares, $128
million in debt, $55
million in cash, and the following projected free cash flow
for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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, $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)...
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