Homework: HW 9.5

Question 1, P9-21 (similar to)

Part 1 of 4

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Part 1

Sora Industries has

64

million outstanding shares,

$123

million in debt,

$59

million in cash, and the following projected free cash flow for the next four years

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:

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

14.0%,

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 year1, 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.)

Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 3 4 Earnings & 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) Gross Profit 154.4 170.3 180.5 189.5 Selling, General & Admin. (93.6) (103.2) (109.4) (114.9) 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: Increases in NWC (6.3) (8.6) (5.6) (4.9) 12 Free Cash Flow 25.3 24.6 30.8 33.3 4 5 6