Question

Sora Industries has 60 million outstanding​ shares, $121 million in​ debt, $56

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 5.3 %

rate beyond year four. If​ Sora's weighted average cost of capital is 10.0 %

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)

The excel working table for each sub part is attached as image format in the attachment

COGS %	67%
Selling, gen and admin	20%
Working Capital	18%	18%	18%	18%	18%
Net WC	77.9	84.2	92.9	98.5	103.4
Increase in NWC		6.3	8.6	5.6	4.9

The excel working table is attached as image format in the attachment

Value of Sora stock = 8.89

b)

COGS %	70%
Selling, gen and admin	20%
Working Capital	18%	18%	18%	18%	18%
Net WC	77.9	84.2	92.9	98.5	103.4
Increase in NWC		6.3	8.6	5.6	4.9

The excel working table is attached as image format in the attachment

Value of Sora stock = 5.76

c)

COGS %	67%
Selling, gen and admin	16%
Working Capital	18%	18%	18%	18%	18%
Net WC	77.9	84.2	92.9	98.5	103.4
Increase in NWC		6.3	8.6	5.6	4.9

The excel working table is attached as image format in the attachment

Value of Sora stock = 13.07

d)

COGS %	67%
Selling, gen and admin	20%
Working Capital	18%	12%	12%	12%	12%
Net WC	77.9	56.2	61.9	65.6	68.9
Increase in NWC		-21.78	5.8	3.7	3.3

The excel working table is attached as image format in the attachment

Value of Sora stock = 9.81