Question

Sora Industries has 6868 million outstanding shares, $120 million in debt, $49 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	468	516	547	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	7.5	9	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 4.4% rate beyond year 4. If Sora's weighted average cost of capital is 11.0% , 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.)

Answer 1

ANSWER: Part 1 PeriodFormula Used Calculation FCF (in Mn) Discount Factor Present Value 22.79 19.97 22.52 21.94 $ 25.30 0.900900901 $ $ 24.60 0.811622433 $ $ 30.80 0.731191381 $ $33.30 0.658730974 $ 2 4 FCF/k-g (where K is cost of capital & G is growth Rate | 33.3/(11-44)% | $ 504.55 | 0.658730974| $ 332.36 NPV/ Value of Firm (in Mn Less Debt (in Mn Value of Equity (in Mn No of Share (in Mn Share Price (In $ $419.57 $120.00 $299.57 6868 0.044

Part 4 Increase Discount FCF (in Factor Present Mn Net Formula Old WC New WC Increase inin WC |@18% Period Sale l@12% |WC (Old) |(New) |Increase lold FCF |New FCF|Used Calculation 1196 Value 0 $433.00 77.94 1 468.00 S 84.24 56.16$ 2$516.00 $ 92.88 61.92 $ 1 $ 48.09 6.30 21.78 -28.08 25.30 53.38 8.64$-5.76 -2.88 24.60 27.48 -5.58 | $ -3.72| $ -1.86| $ 30.80| $ 32.66 -3.28$-1.64 $ 33.30 34.94 27.48 0.8 | $547.00|$ 98.46 | $ б5.64| $ S 32.66 0.731191 $ 23.88 34.94 0.658731 $ 23.0:1 4$574.30 103.37 S 68.92 4.91 FCF/k-g (where K is cost of capital & G is growth Rate 22.96/(114.4% $ 529.36 | 0.658731| $ 348.71 NPV/ Value of Firm (in Mn Less Debt (in Mn) Value of Equity (in Mn) No of Share (in Mn Share Price (In $) $466.00 120.00 346.00 6868 0.050