Question
Sora Industries has 60 million outstanding shares, $128 million in debt, $58 million in cash, and the following projected free cash flow for the next
Sora Industries has
60
million outstanding shares,
$128
million in debt,
$58
million in cash, and the following projected free cash flow for the next four years:
Year | 0 | 1 | 2 | 3 | 4 |
| ||
Earnings and FCF Forecast ($ million) | ||||||||
1 | Sales | 433.0 | 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) | |||
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 | 7.0 | 7.5 | 9.0 | 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 | 25.325.3 | 24.624.6 | 30.830.8 | 33.333.3 |
a. Suppose Sora's revenue and free cash flow are expected to grow at a
4.3%
rate beyond year four. If Sora's weighted average cost of capital is
13.0%,
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.)
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