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. 
| 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
