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Value of​ Stock Assignment | Homework For You

Sora Industries has 60 million outstanding​ shares, $ 120 million in​ debt, $ 40 million in​ cash, and the following projected free cash flow for the next four years.  Homework For You

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Year 0 1 2 3 4
Earning & FCF Forecast ($millions)
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: Increases 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 5.0% rate beyond year 4. If​ Sora’s weighted average cost of capital is 10.0 %, what is the value of​ Sora’s stock based on this​ information? The stock price for this case is $ round to two decimal points.

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.)  Get Finance homework help today

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