9-8

Sora Industries has 66 million outstanding shares, $123 million in debt, $51 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 4.7% rate beyond year 4. If Sora's weighted average cost of capital is 14.0%, what is the value of Sora's stock based on this information?

The stock price for this case is $________ (Round to two decimal places.)

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?

The stock price for this case, when COGS increases, is $________ (Round to two decimal places.)

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.)

The stock price for this case, when selling and SG&A costs decrease, is $________ (Round to two decimal places.)

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.)

The stock price for this case, when working capital needs are reduced, is $_________ (Round to two decimal places.)

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