In: Finance
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) |
|||
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 5.9% 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.)