Question

Sora Industries has 60 million outstanding​ shares, $121 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 5.9% 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.)

PLEASE ANSWER THESE QUESTIONS: The answers are suppose to be small varying from $2-$6

Answer 1

a.

GOGS%	67%
Selling, General, & Admin	20%
Working Capital	18%	18%	18%	18%	18%
Net Working Capital	77.9	84.2	92.9	98.5	103.4
Increase in Workinh Capital		6.3	8.6	5.6	4.9

		0	1	2	3	4	5
1	Sales	433	468	516	547	574.3
2	Growth Vs. Previous year		8.10%	10.30%	6%	5%
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	-7.5	-9	-9.5
7	EBIT		53.8	59.6	62.1	65.2
8	Less: Income Tax @40%		-21.5	-23.8	-24.8	-26.1
9	Plus: Depreciation		7	7.5	9	9.5
10	Less: Capital Expenditures		-7.7	-10	-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	35.3
	Value of the firm at the end of 4 year (35.3 / (11%-5.9%)					691.46
	Total Inflow		25.3	24.6	30.8	724.76
	PV Factor @11%		0.9009	0.8116	0.7312	0.6587
	Present value of inflows		22.79	19.97	22.52	477.40
	Enterprise value	542.68
	Less: Debt	-121
	Add: Cash	51
	Equity value	472.68
	Number of shares	60
	Share value	7.88

b. If Cost of goods sold is 70% of sales.

		0	1	2	3	4	5
1	Sales	433	468	516	547	574.3
2	Growth Vs. Previous year		8.10%	10.30%	6%	5%
3	Cost of Goods Sold		-327.6	-361.2	-382.9	-402.01
4	Gross Profit		140.4	154.8	164.1	172.29
5	Selling, General, & Admin		-93.6	-103.2	-109.4	-114.9
6	Depreciation		-7	-7.5	-9	-9.5
7	EBIT		39.8	44.1	45.7	47.89
8	Less: Income Tax @40%		-15.92	-17.64	-18.28	-19.156
9	Plus: Depreciation		7	7.5	9	9.5
10	Less: Capital Expenditures		-7.7	-10	-9.9	-10.4
11	Less: Increase in NWC		-6.3	-8.6	-5.6	-4.9
12	Free Cash flow		16.88	15.36	20.92	22.934	24.3
	Value of the firm at the end of 4 year (24.3 / (11%-5.9%)					476.22
	Total Inflow		16.88	15.36	20.92	499.15
	PV Factor @11%		0.9009	0.8116	0.7312	0.6587
	Present value of inflows		15.21	12.47	15.30	328.79
	Enterprise value	371.76
	Less: Debt	-121
	Add: Cash	51
	Equity value	301.76
	Number of shares	60
	Share value	5.03

c. The firm reduces its​ selling, general, and administrative expenses from​ 20% of sales to​ 16% of sales:

		0	1	2	3	4	5
1	Sales	433	468	516	547	574.3
2	Growth Vs. Previous year		8.10%	10.30%	6%	5%
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		-74.9	-82.6	-87.5	-91.9
6	Depreciation		-7	-7.5	-9	-9.5
7	EBIT		72.5	80.2	84.0	88.1
8	Less: Income Tax @40%		-29.0	-32.1	-33.6	-35.2
9	Plus: Depreciation		7	7.5	9	9.5
10	Less: Capital Expenditures		-7.7	-10	-9.9	-10.4
11	Less: Increase in NWC		-6.3	-8.6	-5.6	-4.9
12	Free Cash flow		36.5	37.0	43.9	47.1	49.8
	Value of the firm at the end of 4 year (49.8 / (11%-5.9%)					977.34
	Total Inflow		36.512	37.044	43.888	1024.40
	PV Factor @11%		0.9009	0.8116	0.7312	0.6587
	Present value of inflows		32.89	30.06	32.09	674.77
	Enterprise value	769.82
	Less: Debt	-121
	Add: Cash	51
	Equity value	699.82
	Number of shares	60
	Share value	11.66

d.

GOGS%	67%
Selling, General, & Admin	20%
Working Capital	18%	12%	12%	12%	12%
Net Working Capital	77.9	56.2	61.9	65.6	68.9
Increase in Workinh Capital		-21.8	5.8	3.7	3.3

		0	1	2	3	4	5
1	Sales	433	468	516	547	574.3
2	Growth Vs. Previous year		8.10%	10.30%	6%	5%
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	-7.5	-9	-9.5
7	EBIT		53.8	59.6	62.1	65.1
8	Less: Income Tax @40%		-21.5	-23.8	-24.8	-26.1
9	Plus: Depreciation		7	7.5	9	9.5
10	Less: Capital Expenditures		-7.7	-10	-9.9	-10.4
11	Less: Increase in NWC		21.78	-5.76	-3.72	-3.276
12	Free Cash flow		53.4	27.5	32.6	34.9	37.0
	Value of the firm at the end of 4 year (37 / (11%-5.9%)					724.85
	Total Inflow		53.36	27.5	32.64	759.76
	PV Factor @11%		0.9009	0.8116	0.7312	0.6587
	Present value of inflows		48.07	22.32	23.87	500.46
	Enterprise value	594.71
	Less: Debt	-121
	Add: Cash	51
	Equity value	524.71
	Number of shares	60
	Share value	8.75