Question

Sora Industries has 61 million outstanding shares, $130 million in debt, $60 million 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	468	516	547	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	7.5	9	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	24.6	30.8	33.3

a. Suppose​ Sora's revenue and free cash flow are expected to grow at a 3.3 % rate beyond year four. If​ Sora's weighted average cost of capital is 9.0 %, 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

Answer a:

Value of Sora stock = $7.36

Workings:

Base data 67% GOGS % Selling, General & Admin 20% Workings capital 18% 189 18% 18% 18% Net Working capital 77.9 84.292.9 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 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 (4.9) 11lLess, Increase in NWC 8.6 5.6 12 Free Cash Flow 25.3 24.6 34.4 30.8 33.3 Value of firm at the end year 4 (34.4/(996-3.3% 603.5 Total Inflow 636.79 25.30 24.60 30.80 PV factor (1/(1+9%)^Year) 0.91743 0.841680.772180.70843 Present value of inflows 23.21 20.71 23.78 451.12 Enterprise value 518.82 Less, Debt (130.00) Add, Cash 60.00 Equity value 448.82 Number of shares 61 $7.36 Share value

Answer b:

Value of Sora stock = $4.67

Working:

Base data GOGS % 70% Selling, General & Admin 20% Workings capital 18% 189 18% 18% 18% Net Working capital 84.292.9 77.9 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 433.0468.0 516.0 547.0 574.3 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 7 EBIT 39.8 44.1 45.7 47.9 19.2) 81 Less. Income tax at 40% (15.9)(17.6)(18.3) 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10.4) 10 Less: Capital Expenditure (7.7)(10.0(9.9) 4.9) (6.3) (8.6) (5.6) 11lLess, Increase in NWC 12 Free Cash Flow 16.9 15.3 20.9 22.9 23.7 Value of firm at the end year 4 (34.4/(996-3.3% 415.0 Total Inflow 16.9015.30 20.90 437.91 PV factor (1/(1+9%)^Year) 0.91743 0.841680.772180.70843 Present value of inflows 310.23 15.5012.88 16.14 Enterprise value 354.75 Less, Debt (130.00) Add, Caslh 60.00 Equity value 284.75 Number of shares 61 $4.67 Share value

Answer c:

Value of Sora stock = $10.93

Base data 67% GOGS 96 Selling, General & Admin 16% Workings capital 18% 18%) 18%) 18% 18% Net Working capital 84.292.9 77.9 98.5 103.4 Increase in net working capital 5.6 8.6 4.9 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 433.0468.0 516.0 547.0 574.3 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)(87.5) 5 Selling, General & Admin 91.9 (7.0) (7.5)(9.0) 72.6 80.2 61 Depreciation 9.5 7 EBIT 84.0 88.1 (29.0) (32.1(33.6) 8 Less, income tax at 40% 35.3 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10 Less: Capital Expenditure (10.0)(9.9) 10.4 7 (6.3) (8.6 (5.6) 36.5 37.0 11lLess, Increase in NWC 4.9 12 Free Cash Flow 47.1 43.9 48.7 Value of firm at the end year 4 (34.4/(996-3.3% 853.6 Total Inflow 36.50 37.00 43.90 900.68 PV factor (1/(1+996)/year) 0.91743 0.841680.772180.70843 Present value of inflows 33.49 31.14 33.90 638.07 Enterprise value 736.59 Less, Debt (130.00) Add, Caslh 60.00 Equity value 666.59 Number of shares 61 $10.93 Share value

Answer d:

Value of Sora stock = $8.20

Base data GOGS % 67% Selling, General & Admin 20% 12% 12% 12% Workings capital 18% 12% 56.2 61.9 Net Working capital 77.9 65.6 68.9 Increase in net working capital 21.78 5.8 3.7 3.3 Year 0 2 4 Earnings and FCF forecast (S million 1 Sales 574.3 433.0468.0 516.0 547.0 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 154.4170.3 180.5 189.5 5 Selling, General & Admin (93.6) (103.2) (109.4) (114.9) (7.0)7.5)(9.0) Depreciation 9.5 71 EBIT 53.8 59.6 62.1 65.2 (21.5)(23.8 (24.8) 8 Less, income tax at 40% 26.1 9 Plus: Depreciation 7.0 7.5 9.0 9.5 10.4) 10 Less: Capital Expenditure 7.7 10.0 9.9 11lLess, Increase in NWC 21.8 5.8 3.3) 12 Free Cash Flow Value of firm at the end year 4 (34.4/(9%-3.3%) 53.4 27.5 32.6 34.9 36.1 632.5 Total Inflow 667.39 53.40 27.50 32.60 PV factor (1/(1+9%)^Year) 0.91743 0.841680.772180.70843 Present value of inflows 48.99 23.15 25.17 472.79 570.10 Enterprise value Less, Debt (130.00) Add, Caslh 60.00 Equity value 500.10 Number of shares 61 $8.20 Share value