Sora Industries has 61 million outstanding shares, $121 million in debt, $49 million in cash, and the following projected free cash flow for the next four years:

a. Suppose Sora’s revenue and free cash flow are expected to grow at a 5.7% rate beyond year 4. If Sora’s weighted average cost of capital is 11%, what is the value of Sora’s 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. 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? 

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Year Earnings and FCF Forecast ($ millions) 1 Sales 2 3 Cost of Goods Sold Growth versus Prior Year 4 Gross Profit 5 Selling, General, and Administrative 6 Depreciation 7 EBIT 8 Less: Income Tax at 40% 9 Plus: Depreciation 10 11 Less: Increase in NWC 12 Free Cash Flow Less: Capital Expenditures 0 1 433.0 468.0 8.1% (313.6) 154.4 (93.6) (7.0) 53.8 (21.5) 7.0 (7.7) (6.3) 25.3 2 516.0 10.3% 6.0% (345.7) (366.5) 170.3 180.5 (103.2) (109.4) (9.0) (7.5) 59.6 (23.8) 7.5 (10.0) (8.6) 3 24.6 547.0 62.1 (24.8) 9.0 (9.9) (5.6) 30.8 574.3 5.0% (384.8) 189.5 (114.9) (9.5) 65.2 (26.1) 9.5 (10.4) (4.9) 33.3