Sora Industries has

67

million outstanding shares,

$124

million in debt,

$54

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			25.3	24.6	30.8	33.3

answer a-d

433.0 154.4 170.3 180.5 189.5 59.6 65.2 7.5 9.0 9.5 33.3 Earnings and FCF Forecast ($ million) 1 Sales 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 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 62.1 8 Less: Income Tax at 40% (21.5) (23.8) (24.8) (26.1) 9 Plus: Depreciation 7.0 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 25.3 24.6 30.8 a. Suppose Sora's revenue and free cash flow are expected to grow at a 3.6% rate beyond year four. If Sora's weighted average cost of capital is 12.0%, what is the value of Sora stock based on this information? The stock price for this case is $. (Round to the nearest cent.) 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 the nearest cent.) 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.) The stock price for this case, when selling, general, and administrative costs decrease, is $. (Round to the nearest cent.) 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.) The stock price for this case, when working capital needs are reduced, is $ 0. (Round to the nearest cent.) 433.0 154.4 170.3 180.5 189.5 59.6 65.2 7.5 9.0 9.5 33.3 Earnings and FCF Forecast ($ million) 1 Sales 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 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 62.1 8 Less: Income Tax at 40% (21.5) (23.8) (24.8) (26.1) 9 Plus: Depreciation 7.0 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 25.3 24.6 30.8 a. Suppose Sora's revenue and free cash flow are expected to grow at a 3.6% rate beyond year four. If Sora's weighted average cost of capital is 12.0%, what is the value of Sora stock based on this information? The stock price for this case is $. (Round to the nearest cent.) 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 the nearest cent.) 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.) The stock price for this case, when selling, general, and administrative costs decrease, is $. (Round to the nearest cent.) 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.) The stock price for this case, when working capital needs are reduced, is $ 0. (Round to the nearest cent.)