Question

I DE F 0 1 2 Year 3 + 1 2 433 1 Earnings and FCF Forecast ($ million) Sales Growth vs. Prior Year Cost of Goods Sold Gross Profit Selling, General, & Admin. Depreciation EBIT Less: Income Tax at 40% Plus: Depreciation Less: Capital Expenditures Less: Increase in NWC Free Cash Flow 468 8.1% (313.6) 154.4 (93.6) (7.0) 53.8 (21.5) 7 (7.7) (6.3) | 25. 3 516 10.3% (345.7) 170.3 (103.2) (7.5) 59.6 (23.8) 7.5 (10.0) (8.6) 24.6 547 6.0% (366.5) 180.5 (109.4) (9.0) 62.1 (24.8) 9 (9.9) (5.6) 30. 8 574.3 5.0% (384.8) 189.5 (114.9) (9.5) 65.2 (26.1) 9.5 (10.4) (4.9) 33.3

a. Suppose​ Sora's revenue and free cash flow are expected to grow at a 5.9% rate beyond year four. If​ Sora's weighted average cost of capital is 14.0%​, 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) Enterprise Value = Cash flow₄ (1+growth)/(WACC-growth) = 33.3(1+0.059)/(0.14-0.059) = 435.37

B) at  COGS 70% ..change in cash flow = (0.67-0.7)*Sales*(1-40%)=10.33.

Thus year 5 cash flow = 33.3-10.33= 22

Enterprise Value = 22(1+0.059)/(WACC-Growth rate)=23.30/0.081=287.65 new Enterprise value

C) reduction of 4% in SG&A = (0.04*574.3)(1-0.4)=13,73 extra cash or 33.3+13.73 extra cash

Enterprise value now = 47.03(1+0.059)/(0.14-0.059)= 614.87 new enterprise value

D) 6% reduction in NWC = 0.06*revenue cash flow increase over 33.3 +34.4 = 67.7 new cash flow end of year 4

Sora's EV = 67.8(1+0,059)/(0.14-0.059) = 885 is current valuation the HIGHEST amongst all