Sora Industries has 60 million outstanding? shares, $123 million in? debt, $43million in? cash, and the following projected free cash flow for the next four? years:
|
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
|
Earnings and FCF Forecast? ($ 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
|
|
|
25.3 25.3
|
24.6 24.6
|
30.8 30.8
|
33.333.3
|
a. Suppose? Sora's revenue and free cash flow are expected to grow at a 4.7 % 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.)