Question

Thank you so much! Please help me solve the problem b, c, d.

Sora Industries has 67 million outstanding shares, $127 million in debt, $47 million in cash, and the following projected free cash flow for the next four years : a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.9% rate beyond year 4. If Sora's weighted average cost of capital is 120%, 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.) a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.9% rate beyond year 4. If Sora's weighted average cost of capital is 12 0%, what is the value of Sora's stock based on this information? The stock price for this case is $ 475 (Round to two decimal places.) 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 pnce for this case, when COGS increases, is $ (Round to two decimal places.)

Answer 1

0.12 0.049 Cost of Capital Long-run growth rate Cost of goods sold as a percent of sales 0.67 0.2 Selling, General, and Administrative as a percent of sales Net working capital as a percent of sales 0.18 =0.18*E46 Initial Value for Net Working Capital Shares outstanding Debt Cash 127

Year 0 1 2 3 433 -9 Earnings Sales Growth vs. Prior Year Cost of Goods Sold Gross Profit Selling, General, and Administrative Depreciation EBIT Less: Income Tax at 40% Plus: Depreciation Less: Capital Expenditures Less: Increase in NWC Free Cash Flow Terminal Value Total Cash Flow 468 516 547 574.3 =F46/E46-1 =G46/F46-1 =H46/G46-1 =146/H46-1 =-SD$32*F46 =-SD$32*G46 =-SD$32*H46 =-SD$32*146 =F46+F48 =G46+G48 =H46+H48 =146+148 =-F46*SD$35 =-G46*SD$35 =-H46*SD$35 =-146*SD$35 -7.5 -9.5 =F49+F50+F51 =G49+G50+G51 =H49+H50+H51 =149+150+151 =-0.4*F52 =-0.4*G52 =-0.4*H52 =-0.4*152 =-F51 =-G51 =-H51 =-151 -7.7 -10 -9.9 =D39-(SD$37*F46) =($D$37*F46)-(SDS:=(SD$37*G46)-(SD$37*H46) =(SD$37*H46)-(SDS =F52+F53+F54+F55 =G52+G53+G54+G5 =H52+H53+H54+H55+H56 =152+153+154+155+1 =157/(D29-D30) =SUM(F57:F58) =SUM(G57:658 =SUM(H57:H58) -10.4

a. Enterprise value Cash Debt Number of shares Stock price b. Cost of goods sold as a percent of sales Base case of 67% =NPV($D$29,F59:159) =D42 =D41 =D40 =(D61+D62-D63)/D64 Stock Price =D65 10.7 =TABLE(D32) C. Selling, general and administrative as a percent of sales Base case of 20% 0.16 Stock Price =D65 =TABLE(D35) d. Net working capital as a percent of sales Base case of 18% 0.12 Stock Price =D72 =TABLE(D37) Extension: Both COGS and Selling, general and administrative change =D65 10.7 0.16 =TABLE(D35,D32) Extension: Both COGS and Net working capital change =D65 0.12 =TABLE(D37.D32) 0.7 Extension: Both Selling, general and administrative and net working capital change =D65 0.12 0.16 =TABLE(D35,D37)

12.00% 4.90% Cost of Capital Long-run growth rate Cost of goods sold as a percent of sales 67.00% 20.00% 18.00% Selling, General, and Administrative as a percent of sales Net working capital as a percent of sales Initial Value for Net Working Capital Shares outstanding Debt Cash 77.94 671 127.00 47.00

Year 0 1 2 3 4 Earnings and FCF Forecast ($ million) 1 Sales 2 Growth vs. Prior Year 3 Cost of Goods Sold 4 Gross Profit 5 Selling, General, and Administrative 6 Depreciation 7 EBIT 8 Less: Income Tax at 40% 9 Plus: Depreciation 10 Less: Capital Expenditures 11 Less: Increase in NWC 12 Free Cash Flow Terminal Value Total Cash Flow 433.00 468.00 516.00 8.1% 10.3% (313.6) (345.7) 154.4 170.3 (93.6) (103.2) (7.0) (7.5) 53.8 59.6 (21.5) (23.8) 7.0 7.5 (7.7) (10.0) (6.3) (8.6) 253 24.6 547.00 574.30 0.0% 5.0% (366.5) (384.8) 180.5 189.5 (109.4) (114.9) (9.0) (9.5) 62.1 65.2 (24.8) (26.1) 9.0 9.5 (9.9) (10.4) (5.6) (4.9) 30.8 33.3 468.75 499.54 25.30 24.61

a. Enterprise value Cash Debt Number of shares Stock price 397.77 47.00 127.00 67.00 4.74 b. Cost of goods sold as a percent of sales Stock Price Base case of 67% 4.74 70.00% 2.87| c. Selling, general and administrative as a percent of sales Stock Price Base case of 20% 4.74 16.00% 7.24 d. Net working capital as a percent of sales Stock Price Base case of 18% 4.74 12.00% 5.42 Extension: Both COGS and Selling, general and administrative change 4.74 16.00% 70.00% 5.37 Extension: Both COGS and Networking capital change 4.74 12.00% 70.00% 3.54 Extension: Both Selling, general and administrative and net working capital change 4.74 16.00% 12.00% 7.92