Question

Sora Industries has 68 million outstanding​ shares, $125 million in​ debt,$47 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

4.9 %4.9% rate beyond year four. If​ Sora's weighted average cost of capital is 9.0 %9.0%​, 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.)

Answer 1

a). Price per share = $9.07 (Note: There may be slight discrepancies in numbers as exact values for sales, depreciation and capex are not known.)

| Formula 5 602.44 4.90% 67%*5 S-COGS 20%*S 0 1 433.00 468.00 8.1% -313.56 154.44 -93.6 -7 53.84 | -21.536 2 3 4 516.00 547.00 574.30 10.3% 6.0% 5.0% 345.72 -366.49 -384.78 170.28 180.51 189.52 -103.2 -109.4 -114.86 -7.5 -9 -9.5 59.58 62.11| 65.16 -23.832 -24.844 -26.0636 7.5 9.5 -101 -9.9 -10.4 -8.64 -5.58 -4.914 24.61 30.79 33.28 GP-SG&A-D 40%*EBIT - Year (n) Sales (S) Growth vs. Prior Year (9) Cost of Goods Sold (COGS) Gross Profit (GP) Selling, General, & Admin. (SG&A) Depreciation (D) EBIT Less: Income Tax at 40% (T) Plus: Depreciation Less: Capital Expenditures Less: Increase in NWC Free Cash Flow (FCF) Horizon Value (HV) Total Cash Flow (TCF) Discount factor @ WACC PV of TCF Enterprise Value (EV) Less: Debt Add: Cash Equity value Number of shares (N) Price per share ($) -7.7| -6.3 25.30 18%*(Sn-Sn-1) EBIT-T + D-Capex - inc. in NWC FCF5/(WACC-95) FCF + HV 1/(1+9%)an TCF*Discount factor Sum of all PVS 34.91 851.52 25.30 0.917 23.21 24.61 0.842 20.71 30.79 0.772 23.77 884.80 0.708 626.81 694.51 -125 47 EV - Debt + Cash 616.51 68 Equity value/N 9.07

b). If COGS is 70% of Sales then price per share = $5.86

0 433.00 5 602.44 4.90% 8.1% Formula Year (n) Sales (S) Growth vs. Prior Year (9) 70%*S Cost of Goods Sold (COGS) S-COGS Gross Profit (GP) 20%*S Selling, General, & Admin. (SG&A) Depreciation (D) GP-SG&A-D EBIT 40%*EBIT Less: Income Tax at 40% (T) Plus: Depreciation Less: Capital Expenditures 18%*(Sn-Sn-1) Less: Increase in NWC EBIT-T + D-Capex - inc. in NWC Free Cash Flow (FCF) FCF5/(WACC-95) Horizon Value (HV) FCF + HV Total Cash Flow (TCF) 1/(1+9%)^n Discount factor @ WACC TCF*Discount factor PV of TCF Sum of all PVs Enterprise Value (EV) Less: Debt Add: Cash EV - Debt + Cash Equity value Number of shares (N) Equity value/N Price per share ($) 1 2 3 4 468.00 516.00 547.00 574.30 10.3% 6.0% 5.0% -327.60 -361.20 -382.90 -402.01 140.401 154.80 164.10 172.29 -93.6| -103.2 -109.4 -114.86 -7.51 -9 -9.5 39.80 44.10 45.70|| 47.93 -15.92 -17.64 -18.28 -19.172 7.5 9.5 -7.7 -10 -9.91 -10.4 -6.30 -8.64 -5.58 -4.91 16.88 15.32 20.94 22.94 L 24.07 587.03 16.88 0.917 15.49 15.32 0.842 12.89 20.94 0.772 16.17| 609.97 0.708 432.12 476.67 -1251 47 L 398.67 68 5.86

c). If SG&A costs reduce from 20% to 16% of Sales then price per share will be $13.34

0 433.00 1 468.00 602.44 4.90% 8.1% -313.56 154.44 -74.88 Formula Year (n) Sales (5) Growth vs. Prior Year (g) 67%*S Cost of Goods Sold (COGS) S-COGS Gross Profit (GP) 16%*S Selling, General, & Admin. (SG&A) Depreciation (D) GP-SG&A-D EBIT 40%*EBIT Less: Income Tax at 40% (T) Plus: Depreciation Less: Capital Expenditures 18%*(Sn-Sn-1) Less: Increase in NWC EBIT-T + D-Capex - inc. in NWC Free Cash Flow (FCF) FCF5/(WACC-95) Horizon Value (HV) FCF + HV Total Cash Flow (TCF) 1/(1+9%)an Discount factor @ WACC TCF*Discount factor PV of TCF Sum of all PVS Enterprise Value (EV) Less: Debt Add: Cash EV - Debt + Cash Equity value Number of shares (N) Equity value/N Price per share (s) 72.56 -29.024 2 3 4 516.00 547.00 574.30 10.3% 6.0% 5.0% -345.72 -366.49 -384.78 170.28 180.51 189.52 -82.56 -87.52 -91.888 -7.5 -9.5 80.22 99 88.13 -32.088 -33.596 -35.2524 9.5 -10 -10.4 -8.64 -4.91 36.99 43.91 47.06 -7.7 -6.30 36.54 49.37 1204.17 36.54 0917 36.99 0.842 31.14 43.91 0.772 33.91 1251.23 0.708 886.40 33.52 984.97 -125 47 906.97 68 13.34

d). If net working capital in years 1-4 change from 18% to 12% of Sales then price per share will be $9.96

602.44 4.90% 0 1 433.00| 468.00 8.1% -313.56 154.44 -93.60 516.00 547.00 574.300 10.3% 6.0% 5.0% -345.72 -366.49| -384.78 170.28 180.51 189.52 -103.20 -109.40 -114.86 -7.5 -9.5 59.58 62.11 65.16 -23.832 -24.844 -26.0636 53.84 -21.536 -7.7 -10 -9.9 -10.4 Formula Year (n) Sales (5) Growth vs. Prior Year (g) 67%*S Cost of Goods Sold (COGS) S-COGS Gross Profit (GP) 20%*S Selling, General, & Admin. (SG&A) Depreciation (D) GP-SG&A-D EBIT 40%*EBIT Less: Income Tax at 40% (T) Plus: Depreciation Less: Capital Expenditures For year 1: 12%*51 -18%*SO; Years 2-4: 12%(Sn-Sn-1) Less: Increase in NWC EBIT-T + D-Capex - inc. in NWC Free Cash Flow (FCF) FCF5/(WACC-g5) Horizon Value (HV) FCF + HV Total Cash Flow (TCF) 1/(1+9%)^n Discount factor @ WACC TCF*Discount factor PV of TCF Sum of all PVs Enterprise Value (EV) Less: Debt Add: Cash EV - Debt + Cash Equity value Number of shares (N) Equity value/N Price per share ($) -3.72 21.78 53.38 -5.76 27.49 -3.28 34.92 32.65 36.63 893.43 32.65 53.38 0.917 48.98 27.49 0.842 23.14 0.772 25.21 928.35 0.708 657.66 754.98 -125 47 676.98 68 9.96