Question

.: a. Suppose Sora's revenue and free cash flow are expected to grow at a  rate beyond year 4. If Sora's weighted average cost of capital is , what is the value of Sora's stock based on this information? $4.03 is correct 

 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.)

ATTATCHED:

Year 0 1 2 3 4

Earning & FCF Forecast ($millions)

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: Increases in NWC (6.3) (8.6) (5.6) (4.9)

12 Free Cash Flow 25.3 24.6 30.8 33.3