Solution:
Based on the above figures, we can calculate the present value of Free cash flows for Year 1-4 at the discount rate of 10%, WACC, calculation
Present Value of Cash flow during explicit period ( 1-4 year)
Particulars | Years | |||
1 | 2 | 3 | 4 | |
Free Cash Flows ( In $ Million) | 25.3 | 24.6 | 30.8 | 33.3 |
Discounting factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 |
Discounted Free Cash flows ( In $ Million) | 22.99 | 20.31 | 23.13 | 22.74 |
Discounted Value ( In $ Million) | 89.17 |
Discounted Cash Flow at Continuing Value = [Free Cash Flow at 4th year * (1+ growth) / cost of capital - growth ] * Discounting factor at 4th year, here growth is 4.7% rate beyond 4 years.
[33.33 * (1+ 0.047) / 0.10-0.047] * 0.683
=[34.89/0.053] * 0.683
=658.30 * 0.683
= 449.62
Present Value Cash Flow at Continuing Value = $ 449.62 million
Sl No | Particulars | $ Million |
a) | Present Value of Cash flow during explicit period | 89.17 |
b) | Present Value Cash Flow at Continuing Value | 449.62 |
c) | Value of firm (a+b) | 538.79 |
d) | Value of Debt ( given) | 121 |
e) | Value of Equity ( c-d) | 417.79 |
f) | No of outstanding Shares ( given) (nos) | 70 |
g) | Value of each Stock ( e / f) ( not in million) | 5.96 |
Value of each Stock = $ 5.96
b)
Estimate of Change in Value of Stock, by the change in COGS from 67 % of sales to 70 % of sales, therefore increase in COGS by 3% of sales , that is ( 70-67) %, Now calculating Present Value of Cash flow during explicit period and Present Value Cash Flow at Continuing Value.
Present Value of Cash flow during explicit period (1-4 years)
Particulars | Years | |||
1 | 2 | 3 | 4 | |
Free Cash Flows ( In $ Million) | 25.3 | 24.6 | 30.8 | 33.3 |
Less: Increase in COGS of 3 % of Sales ( In $ Million) ( Notes) | 14.04 | 15.48 | 16.41 | 17.22 |
Add: Tax Savings on Additional COGS | 5.61 | 6.19 | 6.56 | 6.88 |
Adjusted Free Cash Flows ( In $ Million) | 16.87 | 15.31 | 20.95 | 22.96 |
Discounting factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 |
Discounted Free Cash flows ( In $ Million) | 15.33 | 12.64 | 15.73 | 15.68 |
Present Value of Cash flow during explicit period | 59.39 |
Notes
Particulars | Years | |||
1 | 2 | 3 | 4 | |
Sales ( In $ million) | 468 | 516 | 547 | 574.3 |
Increase in COGS , 3% of Sales ( In $ million) | 14.04 | 15.48 | 16.41 | 17.22 |
Tax Savings of 40% of Increase in COGS ( In $ million) | 5.61 | 6.19 | 6.56 | 6.88 |
Discounted Cash Flow at Continuing Value = [Free Cash Flow at 4th year * (1+ growth) / cost of capital - growth ] * Discounting factor at 4th year, here growth is 4.7% rate beyond 4 years.
[ 22.96* (1+ 0.047) / 0.10-0.047] * 0.683
=[24.03/0.053] * 0.683
=453.56 * 0.683
= 309.78
Present Value Cash Flow at Continuing Value = $ 309.78 million
Sl No | Particulars | $ Million |
a) | Present Value of Cash flow during explicit period | 59.39 |
b) | Present Value Cash Flow at Continuing Value | 309.78 |
c) | Value of firm (a+b) | 369.17 |
d) | Value of Debt ( given) | 121 |
e) | Value of Equity ( c-d) | 248.17 |
f) | No of outstanding Shares ( given) (nos) | 70 |
g) | Value of each Stock ( e / f) ( not in million) | 3.54 |
Value of each stock = $3.54
The Change in stock = Stock Price before change in COGS - Stock Price after change in COGS
= $ 5.96 - $ 3.54 = $ 2.42, therefore there is decrease in stock price by $ 2.42 in each stock.
c) The selling , general & Administrative Expenses changes from 20% to 16 % of sales
Estimate of Change in Value of Stock, by the change in Selling, gen & Admin Expenses from 20% of sales to 16 % of sales, therefore decrease in selling , general & Administrative Expenses by 4% of sales , that is ( 20-16) %.
Now calculating Present Value of Cash flow during explicit period and Present Value Cash Flow at Continuing Value are as :
Present Value of Cash flow during explicit period (1-4 years)
Particulars | Years | |||
1 | 2 | 3 | 4 | |
Free Cash Flows ( In $ Million) | 25.3 | 24.6 | 30.8 | 33.3 |
Add: Decrease in selling,general & Administrative Expenses by 4% of sales ( In $ Million) ( Notes) | 18.72 | 20.64 | 21.88 | 22.97 |
Less: Tax Expenses on Decrease in selling,general & Administrative Expenses ( In $ Million) ( Notes) | 7.48 | 8.25 | 8.75 | 9.18 |
Adjusted Free Cash Flows ( In $ Million) | 36.54 | 36.99 | 43.93 | 47.09 |
Discounting factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 |
Discounted Free Cash flows ( In $ Million) | 33.21 | 30.55 | 32.99 | 32.16 |
Present Value of Cash flow during explicit period | 128.92 |
Notes
Particulars | Years | |||
1 | 2 | 3 | 4 | |
Sales ( In $ million) | 468 | 516 | 547 | 574.3 |
Decrease in selling,general & Administrative Expenses by 4% of sales ( In $ million) | 18.72 | 20.64 | 21.88 | 22.97 |
Tax Expenses of 40% of Decrease in selling,general & Administrative Expenses ( In $ million) | 7.48 | 8.25 | 8.75 | 9.18 |
Discounted Cash Flow at Continuing Value = [Free Cash Flow at 4th year * (1+ growth) / cost of capital - growth ] * Discounting factor at 4th year, here growth is 4.7% rate beyond 4 years.
[ 47.09* (1+ 0.047) / 0.10-0.047] * 0.683
=[49.30/0.053] * 0.683
=930.24 * 0.683
= 635.36
Present Value Cash Flow at Continuing Value = $ 635.36 million
Sl No | Particulars | $ Million |
a) | Present Value of Cash flow during explicit period | 128.92 |
b) | Present Value Cash Flow at Continuing Value | 635.36 |
c) | Value of firm (a+b) | 764.28 |
d) | Value of Debt ( given) | 121 |
e) | Value of Equity ( c-d) | 643.28 |
f) | No of outstanding Shares ( given) (nos) | 70 |
g) | Value of each Stock ( e / f) ( not in million) | 9.18 |
Value of each Stock = $9.18
The Change in stock = Stock Price after change in COGS - Stock Price before change in COGS
= $ 9.18 - $ 5.96 = $ 3.22, therefore there is increase in stock price by $ 3.22 in each stock.
d) Change in Working Capital
The Net Working Capital at Year 0 is 18 % of Sales in Year 0, = $ 433*18 %= $ 77.94
Year 1
Present Net Working Capital in Year 1 is 77.94+6.3 =$ 84.24 million, this is 18 % of the sales in year 1
(84.24 / 468 )*100
New Working Capital is 12% of Sales in Year 1 , therefore new Working Capital is 468 * 12% = $56.16 million.
Therefore Reduction in Working Capital = $ 84.24 million - $ 56.16 million = $28.08 million
But the Impact from past year from Net Working Capital is $ 77.94 -$56.16 million = $21.78 million
Similarly, we can find the Net working Capital changes in the rest of the years
Particulars | Year1 | Year2 | Year3 | Year4 |
Opening Present Working Capital is ( In $ million) | 77.94 | 84.24 | 92.84 | 98.44 |
Increase in Working Capital ( In $ million) | 6.3 | 8.6 | 5.6 | 4.9 |
Present Working Capital ( In $ million) | 84.24 | 92.84 | 98.44 | 103.34 |
New Working Capital ( 12 % of Sales) (a) ( In $ million) | 56.16 | 61.92 | 65.64 | 68.91 |
Past Working Capital (b) ( In $ million) | 77.94 | 56.16 | 61.92 | 65.64 |
Increase/ ( Decrease) in Working Capital (a-b) ( In $ million) | (21.78) | 5.76 | 3.72 | 3.27 |
Putting the Impact of Changes in Working Capital in Free Cash Flows.
Particulars | Year1 | Year2 | Year3 | Year4 |
Free Cash Flows ( In $ Million) | 25.3 | 24.6 | 30.8 | 33.3 |
Add: Increase in Working Capital ( In $ Million) | 6.3 | 8.6 | 5.6 | 4.9 |
Free Cash Flows before Working Capital Changes ( In $ Million) | 31.6 | 33.2 | 36.4 | 38.2 |
Add: Decrease in Working Capital ( In $ Million) (as computed from above) | 21.78 | - | - | - |
Less: Increase in Working Capital ( In $ Million) (as computed from above) | - | 5.76 | 3.72 | 3.27 |
Free Cash Flows ( In $ Million) | 53.38 | 27.44 | 32.68 | 34.93 |
Discounting factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 |
Discounted Free Cash flows ( In $ Million) | 48.52 | 22.66 | 24.54 | 23.85 |
Present Value of Cash flow during explicit period ( In $ Million) | 119.58 |
Present Value of Cash flow during explicit period = $ 119.58 million
Discounted Cash Flow at Continuing Value = [Free Cash Flow at 4th year * (1+ growth) / cost of capital - growth ] * Discounting factor at 4th year, here growth is 4.7% rate beyond 4 years.
[ 34.93* (1+ 0.047) / 0.10-0.047] * 0.683
=[36.57/0.053] * 0.683
=690.03 * 0.683
= 471.29
Present Value Cash Flow at Continuing Value = $ 471.29 million
Sl No | Particulars | $ Million |
a) | Present Value of Cash flow during explicit period ( In $ Million) | 119.58 |
b) | Present Value Cash Flow at Continuing Value ( In $ Million) | 471.29 |
c) | Value of firm (a+b) ( In $ Million) | 590.87 |
d) | Value of Debt ( given) ( In $ Million) | 121 |
e) | Value of Equity ( c-d) ( In $ Million) | 469.87 |
f) | No of outstanding Shares ( given) (nos) | 70 |
g) | Value of each Stock ( e / f) ( not in million) | 6.71 |
Value of each Stock = $6.71
The Change in stock = Stock Price after change in COGS - Stock Price before change in COGS
= $ 6.71 - $ 5.96 = $ 0.75, therefore there is increase in stock price by $ 0.75 in each stock.
Sora Industries has 70 million outstanding shares, $121 million in debt, $53 million in cash, and...
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