Sora Industries has

69

million outstanding shares,

$127

million in debt,

$40

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

Year 0 1 2 3 4 Earning & FCF Forecast ($millions) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth versus 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, and Administrative -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: Increases in NWC -6.3 -8.6 -5.6 -4.9 12 Free Cash Flow 25.3 24.6 30.8 33.3

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

13.0%,

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

5.2%

rate beyond year 4. If Sora's weighted average cost of capital is

13.0%,

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.)