Question

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)	​(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 11.0 %​, 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 1

a. Find the terminal value for year4=FCFF5/(WACC-g)

g=3.4%

Terminal value Year4=(33.32*(1+3.4%)/(11%-3.4%)=453.3274

Find the value using NPV function in EXCEL

NPV(rate, values)

NPV(11%, Year1 to Year4 cashinflows)

Value of firm=$385.77 million

Value of debt=$125 million

Value of equity=$385.77-125=$260.77

Value of share=Total value of equity/Outstanding shares=$260.77/63=$4.1

Please find the workings as below

b In the same way, calculated for other three questions

If COGS increases to 70% of sales from present 67% of sales

c. If SGA expenses falls to 16% from 20% of sales

d.If networking capital needs fall to 12% in Year1. Here you should take 12% of increase in the revenue ((468-433)*12%)=4.2