Question

Sora Industries has 63 million outstanding? shares, $125 million in? debt, $44 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

5.7% 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?what is the stock price_

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?which is the present value of all future free cash flow ?

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 adminitrative 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.)a. Suppose? Sora's revenue and free cash flow are expected to grow at a 5.7%rate beyond year four. If? Sora's weighted average cost of capital is 11.0%??(Round to the nearest? cent.)

Answer 1

a)	Year	0	1	2	3	4
	Sales	433	468.0	516.0	547.0	574.3
	COGS		313.6	345.7	366.5	384.8
	Gross profit		154.4	170.3	180.5	189.5
	Selling and 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: Tax @ 40%		21.5	23.8	24.8	26.1
	Plus Depreciation		7.0	7.5	9.0	9.5
	Less: Capital Exp.		7.7	10.0	9.9	10.4
	Less : Increase in NWC	(Increase in sales)x 18%	6.3	8.6	5.6	4.9
	FCF		25.3	24.6	30.8	33.3
	Horizon value at t=4(FCF4 x (1+g)/(re-g)					663.7
	NCF		25.3	24.6	30.8	697.0
	PV Fcator @ 11%		0.900901	0.811622	0.731191	0.658731
	PV of NCF		22.7964	19.9724	22.51046	459.1523
	Total value of Sora (Sum of PV of NCF) =		524.4316
	Less: Debt		125
	Add: Cash		44
	Value of equity		443.4316
	No. of shares		63
	Value per share	(Value of equity/No. of shares)	7.038596
b)	Year	0	1	2	3	4
	Sales	433	468.0	516.0	547.0	574.3
	COGS		327.6	361.2	382.9	402.0
	Gross profit		140.4	154.8	164.1	172.3
	Selling and admin		93.6	103.2	109.4	114.9
	Depreciation		7.0	7.5	9.0	9.5
	EBIT		39.8	44.1	45.7	47.9
	Less: Tax @ 40%		15.9	17.6	18.3	19.2
	Plus Depreciation		7.0	7.5	9.0	9.5
	Less: Capital Exp.		7.7	10.0	9.9	10.4
	Less : Increase in NWC	(Increase in sales)x 18%	6.3	8.6	5.6	4.9
	FCF		16.9	15.3	20.9	22.9
	Horizon value at t=4(FCF4 x (1+g)/(re-g)					457.6
	NCF		16.9	15.3	20.9	480.5
	PV Fcator @ 11%		0.900901	0.811622	0.731191	0.658731
	PV of NCF		15.20721	12.43406	15.31115	316.5369
	Total value of Sora (Sum of PV of NCF) =		359.4893
	Less: Debt		125
	Add: Cash		44
	Value of equity		278.4893
	No. of shares		63
	Value per share	(Value of equity/No. of shares)	4.420465
(c )	Year	0	1	2	3	4
	Sales	433	468.0	516.0	547.0	574.3
	COGS		313.6	345.7	366.5	384.8
	Gross profit		154.4	170.3	180.5	189.5
	Selling and admin		74.9	82.6	87.5	91.9
	Depreciation		7.0	7.5	9.0	9.5
	EBIT		72.6	80.2	84.0	88.1
	Less: Tax @ 40%		29.0	32.1	33.6	35.3
	Plus Depreciation		7.0	7.5	9.0	9.5
	Less: Capital Exp.		7.7	10.0	9.9	10.4
	Less : Increase in NWC	(Increase in sales)x 18%	6.3	8.6	5.6	4.9
	FCF		36.5	37.0	43.9	47.1
	Horizon value at t=4(FCF4 x (1+g)/(re-g)					938.6
	NCF		36.5	37.0	43.9	985.7
	PV Fcator @ 11%		0.900901	0.811622	0.731191	0.658731
	PV of NCF		32.91532	30.02354	32.10954	649.3062
	Total value of Sora (Sum of PV of NCF) =		744.3546
	Less: Debt		125
	Add: Cash		44
	Value of equity		663.3546
	No. of shares		63
	Value per share	(Value of equity/No. of shares)	10.52944
d.	Year	0	1	2	3	4
	Sales	433	468.0	516.0	547.0	574.3
	COGS		313.6	345.7	366.5	384.8
	Gross profit		154.4	170.3	180.5	189.5
	Selling and 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: Tax @ 40%		21.5	23.8	24.8	26.1
	Plus Depreciation		7.0	7.5	9.0	9.5
	Less: Capital Exp.		7.7	10.0	9.9	10.4
	Less : Increase in NWC	(Increase in sales)x 18%	21.8	-5.8	-3.7	-3.3
	FCF		53.4	27.5	32.6	34.9
	Horizon value at t=4(FCF4 x (1+g)/(re-g)					696.4
	NCF		53.4	27.5	32.6	731.3
	PV Fcator @ 11%		0.900901	0.811622	0.731191	0.658731
	PV of NCF		48.09369	22.30988	23.87047	481.7503
	Total value of Sora (Sum of PV of NCF) =		576.0243
	Less: Debt		125
	Add: Cash		44
	Value of equity		495.0243
	No. of shares		63
	Value per share	(Value of equity/No. of shares)	7.857529