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

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: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?

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.)

Question content area bottom

Part 1

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

$enter your response here.

(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

$enter your response here.

(Round to two decimal places.)

Part 3

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

$enter your response here.

(Round to two decimal places.)

Part 4

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

$enter your response here.

(Round to two decimal places.)