Question

Sora Industries currently has 60 million outstanding shares, $120 million in debt and $40 million in cash. Sales in the last financial year were $433. They are projected to grow at 8.1% next year, 10.3% in the second year, and 6% in the third year. From the fourth year onwards, sales will grow at 5% per year. Furthermore, you are given that in the last financial year, Sora’s i) cost of goods sold was 67% of sales, ii) selling, general and administrative expenses were 20% of sales, iii) depreciation was 1.5% of sales, iv) gross fixed assets were 22.5% of sales, and v) NWC was 18% of sales. Assuming these ratios remain constant forever, the tax rate for the firm is 40%, and the WACC is 10%:

1. What is the stock price of Sora Industries?
2. 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?
3. Sora’s net working capital needs were estimated to be 18% of sales (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?

Answer 1

year 2 = 46 Current sales = 433 - year i= 433 +8 -1% = 468 Crounded off 2 468 + 10:34 - S16 - 1 3 = 516+ 6%. = 547 to 42 547 +5). -574.3 calculation of change in capital Expenditure:- year o= 433 x 22.5.7. p or 97.425 year 1 = 468 x 22:51 -P) 105:3 Air tapitat tapi od change in capital Expenditure=105:3-97425 = 7.8 It is calculated in the same way for subseqtrent years calculations of Increase in net working capital a y 433 418-4. - 74.94 oy, - 468x184. - 84.24 I . Increase in working capital = 6.3 wor method for subsequent year of Calculations

154.4 103 180.5 189.5 a tarnings and Free cash flow fore cast in $ million I the year No 1 2 3 4 1. sales or 433 468 516 541 514-3 growth and 18.11 10.3% 61. st. a cost of goods (313-6) (345.1) (366.5) (38408) Sold (67% of sales) gross profit 3. selling and other (936) (103:2) (1094) (149) Expenses (20% of sales) 4. Depreciation (7) (4.5) (9.0) (9.5) (1.5% of sales EBIT 53.8 59.6 62.1 65.2 la less tan @ 40% w sro (215) (23.8) (24.8) (26-1) Add: depreciation 4 4.5 9 9.5 les capital Expenditure (1.8) (10) (9.9) (10.4. less: Increase in NwC ... (6.3) (8.6) (5.6) (4.9) Free cash flow 25.2 24.6 30.8 3.3 less Increase In NWC- @5%. From thes year, y on wards FCF to grow using growth perpetuity formula (3) = 33.33 = 666 10%-5%.

a WACC= 10% (6) = 252 +246 + 30.8+666 10 Coszt – - 567 (10)} e = 567+40-120 60 4 (6) In case of cost of goods sold @ 10% 7 everything remains Constant except now Cost of goods sold 704 of sales Instead 67% - year 1 at 3 may 1. sales 468 516 549 574.3 2. Cost of goods (321-6) (361-2) (382-87) (402-02) . Sold (10% of sales) - 15418 140.4 gross profit ) 164.09 112.2g - B. selling &other Eup. (93.6) (103.2) (109:39) (1149) -u. Depreciation (7) (7.5) (9.0) (9.5) 2 EBIT 4 39.8 d 12 44.10 4517 47.98 ! -Less: Tax @vos (15.12) (17-by) (18.28) (19.19) ? - net income st 23.88 12.) 26.46 27.42 28.79 | Plus depreciation Less: capital Expenaliture (1.8) 10) (9.9) Coro less: Increase in NWC (6.3) (8.64) (5.51) 6. 1 7.5 9 9.5 76.88 15:32 20.94 22.92

Та ині дън Еоіtу bумча 1(3): 22.92 = 458 10% -5%. Vo = 16.88 + 15.32 + 20.94+458 o T (1.1727 (1.13 I = 388 L . Salz - to D. = 388 +40-120 60 388 +40-120 - $5.13 T L G In this questions net working capital decreases I from 18% to 12% Yo = 4337181. - 17.94 Y -496841243. 56.16 bop pratl change (reduction) in working capital ( tol) = 77.04 -56.16 decrease in Nwe = 21.78 que retter pris 8 for year 20 (516-468-) X12% = 5.76 (Increase ear 3 (541 - 516) X12% = 13:12 year 3 eory = (514-3-547) +12% = 3.28 71 F orb Cot 1 3 leti yeary = (574. 2

- Every thing remains in Net working capital If we adjust Question (a) to only constant except changes hence It is enough Free cash flows of changes in Noc from Question (a) year 1 Free cash flow 25.2 5 Add: NWC before change 6.3 cess: present increase 21.18 decrease in NWC Free cash flows 53.28 2 3 4 24.6 30.8 33.3 8.6 5.6 4.9 (8:16) (3-12) 8.28) 27.44 32.68 34.02 : V3 = 34.92 698 10% - 5% v. 53.28 + 27.44 + (32.68 +698) (1.132 (0:1) 3 = 620 620 + 40-120 Go . Stock Price = $9