Question
In: Finance
Sora Industries has 60 million outstanding shares, $ 120 million in debt, $ 40 million in...
Sora Industries has 60 million outstanding shares, $ 120 million in debt, $ 40 million in cash, and the following projected free cash flow for the next four years.
| Year | 0 | 1 | 2 | 3 | 4 | ||
| Earning & FCF Forecast ($millions) | |||||||
| 1 | Sales | 433 | 468 | 516 | 547 | 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 | 7.5 | 9 | 9.5 | ||
| 10 | Less: Capital Expenditures | (7.7) | (10.0) | (9.9) | (10.4) | ||
| 11 | Less: Increases 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 5.0% rate beyond year 4. If Sora's weighted average cost of capital is 10.0 %, what is the value of Sora's stock based on this information? The stock price for this case is $ round to two decimal points.
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. Let's return to the assumptions of part (a) and suppose Sora can maintain its cost of goods sold at 67% of sales. However, now suppose Sora 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 (which is their current level in year 0). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions remain as in part (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.)
Solutions
Expert Solution
Steps
- We make the Free Cash Flows as per the information. We find the terminal value at end of Year 3: Year 3 Cash Flow (1+ Growth) / (Cost of Capital - Growth)
- We add the FCF and terminal value
- We discount the Value . DF for each year = 1/ (1+R)^N
- We find PV by multiplying DF and Value
- Take the sum of PV which is value of firm
- We add cash deduct debt to find value of equity
- Divide value of equity by 60 million shares which is value per share
a)
| 0 | 1 | 2 | 3 | |
| Sales | 433 | 468 | 516 | 547 |
| 8.10% | 10.30% | 6.00% | ||
| COGS | 313.6 | 345.9 | 366.7 | |
| GP | 154.46 | 170.37 | 180.60 | |
| SGA | 93.6146 | 103.2569 | 109.4523 | |
| Depreciation | 7 | 7.5 | 9 | |
| EBIT | 53.85 | 59.62 | 62.14 | |
| LessTaxes | -21.54 | -23.85 | -24.86 | |
| Add Dep | 7.00 | 7.50 | 9.00 | |
| Less Capex | -7.7 | -10 | -9.9 | |
| Less Working Capital | -6.31 | -8.68 | -5.58 | |
| FCF | 25.3 | 24.6 | 30.8 | |
| Terminal Value | 647.02 | |||
| Net Total | 25.3 | 24.6 | 677.8 | |
| Discount Factor | 0.91 | 0.83 | 0.75 | |
| PV | 23.00 | 20.32 | 509.26 | |
| Total Value of Firm | 552.59 | |||
| Add Cash | 40 | |||
| Less Debt | -120 | |||
| Value of Equity | 472.59 | |||
| Per Share | 7.88 |
b) COGS increase to 70%, revised value. Corrresponding Gross Profit , EBIT and taxes will change
| 0 | 1 | 2 | 3 | |
| COGS | 327.7 | 361.4 | 383.1 | |
| GP | 140.42 | 154.89 | 164.18 | |
| SGA | 93.6146 | 103.2569 | 109.4523 | |
| Depreciation | 7 | 7.5 | 9 | |
| EBIT | 39.81 | 44.13 | 45.73 | |
| LessTaxes | -15.92 | -17.65 | -18.29 | |
| Add Dep | 7.00 | 7.50 | 9.00 | |
| Less Capex | -7.7 | -10 | -9.9 | |
| Less Working Capital | -6.31 | -8.68 | -5.58 | |
| FCF | 16.9 | 15.3 | 21.0 | |
| Terminal Value | 440.16 | |||
| Net Total | 16.9 | 15.3 | 461.1 | |
| Discount Factor | 0.91 | 0.83 | 0.75 | |
| PV | 15.34 | 12.64 | 346.44 | |
| Total Value of Firm | 374.42 | |||
| Add Cash | 40 | |||
| Less Debt | -120 | |||
| Value of Equity | 294.42 | |||
| Per Share | 4.91 |
c) SGA Reduces to 16% Corrresponding EBIT and taxes will change
| 0 | 1 | 2 | 3 | |
| GP | 154.46 | 170.37 | 180.60 | |
| SGA | 74.89168 | 82.60552 | 87.56185 | |
| Depreciation | 7 | 7.5 | 9 | |
| EBIT | 72.57 | 80.27 | 84.03 | |
| LessTaxes | -29.03 | -32.11 | -33.61 | |
| Add Dep | 7.00 | 7.50 | 9.00 | |
| Less Capex | -7.7 | -10 | -9.9 | |
| Less Working Capital | -6.31 | -8.68 | -5.58 | |
| FCF | 36.5 | 37.0 | 43.9 | |
| Terminal Value | 922.84 | |||
| Net Total | 36.5 | 37.0 | 966.8 | |
| Discount Factor | 0.91 | 0.83 | 0.75 | |
 jeff jeffy answered 1 year agoRelated SolutionsSora Industries has 60 million outstanding shares, $ 120 million in debt, $ 40 million in...Sora Industries has
60 million outstanding shares,
$ 120 million in debt,
$ 40 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)...
Sora Industries currently has 60 million outstanding shares, $120 million in debt and $40 million in...Sora Industries currently has 60 million outstanding shares,
$120 million in debt and $40 million in excess cash. Sales in the
recently concluded financial year was $433 million. They are
projected to grow at 8.4% next year, and from the second year
onwards, at 5% per year. Furthermore, you are given that in the
last financial year, Sora’s
Cost of goods sold was 70% of sales,
Selling, general and administrative expenses were 20% of
sales,
Depreciation was 1.5% of sales...
Sora Industries has 6060 million outstanding shares, $ 120$120 million in debt, $ 40$40 million in...Sora Industries has
6060
million outstanding shares,
$ 120$120
million in debt,
$ 40$40
million in cash, and the following projected free cash flow for
the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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)...
Sora Industries has 60 million outstanding shares, $122million in debt, $53 million in cash, and the...Sora Industries has 60 million outstanding shares, $122million
in debt, $53 million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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...
Sora Industries has 60 million outstanding shares, $121 million in debt, $51 million in cash, and...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)...
Sora Industries has 66 million outstanding shares, $124 million in debt, $60 million in cash, and...Sora Industries has 66 million outstanding shares, $124 million
in debt, $60 million in cash, and the following projected free cash
flow for the next four years:
Year 0 1 2 3
4 Earning & FCF Forecast ($millions)
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%
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...
Sora Industries has 60 million outstanding shares, $121 million in debt, $56 million in cash, and...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)...
Sora Industries has 61 million outstanding shares, $130 million in debt, $60 million in cash, and...
Sora Industries has 61 million outstanding shares, $130 million in
debt, $60 million in cash, and the following projected free cash
flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ million)
1
Sales
433
468
516
547
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)...
Sora Industries has 63 million outstanding shares, $ 130 million in debt, $ 56 million in...Sora Industries has 63 million outstanding shares, $ 130 million
in debt, $ 56 million in cash, and the following projected free
cash flow for the next four years LOADING... : a. Suppose Sora's
revenue and free cash flow are expected to grow at a 4.9 % rate
beyond year 4. If Sora's weighted average cost of capital is 10.0 %
, what is the value of Sora's stock based on this information? b.
Sora's cost of goods sold was...
Sora Industries has 66 million outstanding shares, $124 million in debt, $50million in cash, and the...Sora Industries has 66 million outstanding shares, $124 million
in debt, $50million in cash, and the following projected free
cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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...
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