Question

this is business 241 question... need help

P 10-8 (similar to) Sora Industries has 65 million outstanding shares, $123 million in debt, $46 million in cash, and the following projected free cash flow for the next four years: Year012 3 4 Earnings and FCF Forecast (s million) 1 Sales 433.0 468.0 516.0547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 3 Cost of Goods Sold 4 Gross Profit (313.6) (345.7) (366.5) (384.8) 154.4 180.5 (93.6) (103.2) (109.4) (114.9) (7.0) (7.5) (9.0) 170.3 189.5 5 Selling, General, & Admin. 6 Depreciation (9.5) 7 EBIT 53.8 59.6 62.1 65.2 (21.5) (23.8) (24.8) (26.1) 7.59.09.5 8 Less: Income Tax at 40% 7.0 a Suppose Sora's revenue and free cash flow are expected to grow at a 3.9% rate beyond year four ïf So as weighted average cost of capital s 11 9 Plus: Denreciation Soas at is the value o e The stock price for this case is $ 5.10. (Round to the nearest cent.) 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? The stock price for this case, when COGS increases, is $1 (Round to the nearest cent.) unieWorK Save Score: 0 of 1 pt 3 of 3 (3 complete) HW Score: 66.67%, 2 of 3 pts 3P 10-8 (similar to) Question Help EBIT 8 Less: Income Tax at 40% 9 Plus: Depreciation 10 Less: Capitai Expenditures 11 Less: Increase in NWC 12 Free Cash Flow 53.8 59.8 62.1 65.2 (21.5) (23.8) (24.8) (261) 7.D 7.5 9.0 (7.7 (10.0) (99)10.4) (6 3) 25.3 9.5 8.8) 24.6 (5.6) 30.8 33.3 a suppose Sora's revenue and free cash flow are expected to grow at a 3.9% rate beyond year four it Sora's weighted average cost of capital is 11 b. Sora s cost of goods sold was assumed to be 67% of sales. If its cost af goods sold is actually 70% of sales, how would theestí ale 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 frm educes a teling general and administ at ee sales. What stock price would you estimate now? (Assume no other expenses, except taxes, are d. Sora's net working capital what stock price do you estimate for Sora? (Hint. This change will have the la .0%, what is the value of Sara stock based on tis ifomaton? torn 20% of sales to 16% of ereesoom needs were estimated to be 18% of sales (their current level in year zero r sora can reduce this requirement to 12% af sales starting in year t rgest impact on Sora's free cash flow in , but all other assmptons are as in year 1.) value of Sora stock based on this information? beyond year four. If Sora's weighted average cost of capital is 1 10%, what is the a. Suppose Sora's revenue and free cash flow are expected to grow at a 3.9% rate The stock price for this case is s 5.10. (Round to the nearest oent.) s cost of goods sold is actually 70% of sales, how would the estimate of the stock's value change? b. Sara's cost of goods sold was assumed to be 67% of sales. If it The stock price for this case, when COGS increases, is s(Round to the nearest cant.)

Answer 1

Answer a:

The stock price for this case in $5.10

Workings:

Base data 67% GOGS % Selling, General & Admin 20% Workings capital 18% 77.984.292.9 Net Working capital 98.5 103.4 Increase in net working capital 8.6 5.6 4.9 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 433.0468.0 516.0547.0 574.3 2 Growth Vs. Previous Year 8.10%) 10.30% 696 5% 3 Cost of goods sold (313.6) (345.7) (366.5)(384.8) 4 Gross Profit 189.5 154.4170.3 180.5 5 Selling, General & Admin (93.6) (103.2) (109.4) (114.9) (7.0) (7.5)(9.0) 6 Depreciation 9.5 53.8 59.6 71 EBIT 62.1 65.2 8 Less, income tax at 40% (21.5) (23.8) 26.1 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10 Less: Capital Expenditure (7.7)(10.0(9.9) 10.4 (6.3) (8.6) (5.6) 11lLess, Increase in NWC 4.9 12 Free Cash Flow 25.3 24.6 30.8 33.3 Value of firm at the end year 4 (34.6/(11%-3.9% 487.3 Total Inflow 25.3 24.6 30.8 520.6 PV factor (1/(1+11%)^Year) 0.90090 0.81162 0.73119 0.65873 22.8 20.0 Present value of inflows 22.5 342.9 Enterprise value 408.2 (123.0) Less, Debt 46.0 Add, Cash Equity value 331.2 330.9 Number of shares 65 Share value 5.10

Answer b:

The stock price for this case when COGS increases is 3.10

Working:

Base data COGS % 70% Selling, General & Admin 20% Workings capital 18% 77.984.292.9 Net Working capital 98.5 103.4 Increase in net working capital 8.6 5.6 4.9 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 574.3 433.0468.0 516.0547.0 2 Growth Vs. Previous Year 8.10%) 10.30% 696 5% 3 Cost of goods sold (327.6) (361.2) (382.9)(402.0) 4 Gross Profit 172.3 140.4154.8 164.1 5 Selling, General & Admin (93.6) (103.2) (109.4) (114.9) (7.0)(7.5)(9.0) 6 Depreciation 9.5 47.9 71 EBIT 39.8 44.1 45.7 19.2) 8 Less, income tax at 40% (15.9)(17.6) (18.3) 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10 Less: Capital Expenditure 10.4 7. 10.0 9.9 (6.3) (8.6) (5.6) 11lLess, Increase in NWC 4.9 12 Free Cash Flow 16.9 15.3 20.9 22.9 Value of firm at the end year 4 (34.6/(11%-3.9% 335.1 Total Inflow 16.9 15.3 20.9 358.0 PV factor (1/(1+11%)^Year) 0.90090 0.81162 0.73119 0.65873 Present value of inflows 15.2 12.4 15.3 235.8 Enterprise value 278.8 (123.0) Less, Debt 46.0 Add, Caslh Equity value 201.8 330.9 Number of shares 65 Share value 3.10

Answer c:

The stock price for this case when SG&A Exp decreases7.74

Workings:

Base data 67% COGS % Selling, General & Admin 16% Workings capital 18% Net Working capital 77.9 84.2 92.9 98.5 103.4 Increase in net working capital 8.6 5.6 4.9 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 433.0 468.0 516.0547.0 574.3 2 Growth Vs. Previous Year 8.10%) 10.30% 696 5% 3 Cost of goods sold (313.6) (345.7) (366.5) (384.8) 4 Gross Profit 189.5 154.4170.3 180.5 (74.9)(82.6) 91.9) 5 Selling, General & Admin 87.5 61 Depreciation 7.0 7.5 9.0 9.5 72.6 80.2 7 EBIT 84.0 88.1 8 Less, income tax at 40% (29.0)(32.1) 33.6 35.3) 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10.4) 10 Less: Capital Expenditure 7 10.0 9.9 (4.9) 11lLess, Increase in NWC 8.6 5.6 12 Free Cash Flow 47.1 36.5 37.0 43.9 Value of firm at the end year 4 (34.6/(11%-3.9% 689.3 Total Inflow 736.4 36.5 37.0 43.9 PV factor (1/(1+11%)^Year) 0.90090 0.81162 0.73119 0.65873 Present value of inflows 485.1 32.9 30.0 32.1 Enterprise value 580.1 (123.0) Less, Debt 46.0 Add, Cash Equity value 503.1 330.9 Number of shares 65 Share value 7.74

Answer d:

The stock price for this case when NWC from Year 1 to 4 decreases is $ 5.80

Workings:

Base data 67% COGS % Selling, General & Admin 20% Workings capital 18% 12% 12% 12% 12% Net Working capital 77.9 56.2 61. 65.6 68.9 Increase in net working capital 3.7 21.78 5.8 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 433.0 468.0 516.0547.0 574.3 2 Growth Vs. Previous Year 8.10%) 10.30% 696 5% 3 Cost of goods sold (313.6) (345.7) (366.5) (384.8) 4 Gross Profit 189.5 154.4170.3 180.5 5 Selling, General & Admin (93.6) (103.2) (109.4) (114.9) 61 Depreciation 7.0 7.5 9.0 9.5 7 EBIT 53.8 59.6 62.1 65.2 26.1) 8 Less, income tax at 40% 21.5 23.8 24.8 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10.4) 10 Less: Capital Expenditure 7 10.0 9.9 11lLess, Increase in NWC 21.8 5.8 3.3 12 Free Cash Flow 53.4 27.5 32.6 34.9 Value of firm at the end year 4 (34.6/(11%-3.9% 510.7 Total Inflow 53.4 27.5 32.6 545.6 PV factor (1/(1+11%)^Year) 0.90090 0.81162 0.73119 0.65873 Present value of inflows 48.1 22.3 23.8 359.4 Enterprise value 453.7 (123.0) Less, Debt 46.0 Add, Cash Equity value 376.7 330.9 Number of shares 65 Share value 5.80