Question

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)
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: 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 3.3 % rate beyond year four. If​ Sora's weighted average cost of capital is 9.0 %, 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

Answer a:

Value of Sora stock = $7.36

Workings:

Answer b:

Value of Sora stock = $4.67

Working:

Answer c:

Value of Sora stock = $10.93

Answer d:

Value of Sora stock = $8.20