Sora Industries has 64 million outstanding shares, $128 million in debt, $57 million in cash, and the following projecte free cash flow for the next four years : a. Suppose Sora's revenue and free cash flow are expected to grow at a 5.2% rate beyond year 4. If Sora's weighted average cost of capital is 12.0%, what is the value of Sora's stock based on this information? b. Sora's cost of goods sold was assumed to be 67% of sales. If its cost of goods sold is actually 70% of sales, how would the estimate of the stock's value change? c. Let's return to the assumptions of part (a) and suppose Sora can maintain its cost of goods sold at 67% of sales. However, now suppose Sora reduces its selling, general, and administrative expenses from 20% of sales to 16% of sales. What stock price would you estimate now? (Assume no other expenses, except taxes, are affected.) d. Sora's net working capital needs were estimated to be 18% of sales (which is their current level in year 0). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions remain as in part (a), what stock price do you estimate for Sora? (Hint: This change will have the largest impact on Sora's free cash flow in year (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 3 Earnings & FCF Forecast ($ million) 1 Sales 433.0 516.0 547.0 574.3 2. Growth vs. Prior Year Cost of Goods Sold 3 4 5 6 468.0 8.1% (313.6) 154.4 (93.6) (7.0) 53.8 (21.5) 7.0 (7.7) (6.3) 25.3 7 Gross Profit Selling, General & Admin. Depreciation EBIT Less: Income tax at 40% Plus: Depreciation Less: Capital Expenditures Less: Increases in NWC Free Cash Flow 10.3% 6.0% 5.0% (345.7) (366.5) (384.8) 170.3 180.5 189.5 (103.2) (109.4) (114.9) (7.5) (9.0) (9.5) 59.6 62.1 65.2 (23.8) (24.8) (26.1) 7.5 9.0 9.5 (10.0) (9.9) (10.4) (8.6) (5.6) (4.9) 24.6 30.8 33.3 8 9 10 11 12 Sora Industries has 64 million outstanding shares, $128 million in debt, $57 million in cash, and the following projecte free cash flow for the next four years : a. Suppose Sora's revenue and free cash flow are expected to grow at a 5.2% rate beyond year 4. If Sora's weighted average cost of capital is 12.0%, what is the value of Sora's stock based on this information? b. Sora's cost of goods sold was assumed to be 67% of sales. If its cost of goods sold is actually 70% of sales, how would the estimate of the stock's value change? c. Let's return to the assumptions of part (a) and suppose Sora can maintain its cost of goods sold at 67% of sales. However, now suppose Sora reduces its selling, general, and administrative expenses from 20% of sales to 16% of sales. What stock price would you estimate now? (Assume no other expenses, except taxes, are affected.) d. Sora's net working capital needs were estimated to be 18% of sales (which is their current level in year 0). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions remain as in part (a), what stock price do you estimate for Sora? (Hint: This change will have the largest impact on Sora's free cash flow in year (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 3 Earnings & FCF Forecast ($ million) 1 Sales 433.0 516.0 547.0 574.3 2. Growth vs. Prior Year Cost of Goods Sold 3 4 5 6 468.0 8.1% (313.6) 154.4 (93.6) (7.0) 53.8 (21.5) 7.0 (7.7) (6.3) 25.3 7 Gross Profit Selling, General & Admin. Depreciation EBIT Less: Income tax at 40% Plus: Depreciation Less: Capital Expenditures Less: Increases in NWC Free Cash Flow 10.3% 6.0% 5.0% (345.7) (366.5) (384.8) 170.3 180.5 189.5 (103.2) (109.4) (114.9) (7.5) (9.0) (9.5) 59.6 62.1 65.2 (23.8) (24.8) (26.1) 7.5 9.0 9.5 (10.0) (9.9) (10.4) (8.6) (5.6) (4.9) 24.6 30.8 33.3 8 9 10 11 12
