Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash, and the following projected free cash flow for the next four years:Year234Earnings and FCF Forecast ($ million)1 Sales433.0468.0516.0547.0574.32 Growth vs. Prior Year8.1%10.3%6.0%5.0%3 Cost of Goods Sold(313.6)(345.7)(366.5)180.5(384.8)4 Gross Profit154.4170.3189.5(93.6)(7.0)(103.2)(7.5)(109.4)(9.0)5 Selling, General, & Admin.6 Depreciation7 EBIT8 Less: Income Tax at 40%9 Plus: Depreciation(114.9)(9.5)53.859.662.165.2(21.5)(23.8)(24.8)(26.1)7.07.59.09.5 9 Plus: Depreciation7.07.59.09.510 Less: Capital Expenditures(7.7)(6.3)(10.0)(8.6)(9.9)(5.6)(10.4)(4.9)11 Less: Increase in NWC12 Free Cash Flow25.324.630.833.3a. Suppose Sora's revenue and free cash flow are expected to grow at a 5.0% rate beyond year four. If Sora's weighted average cost of capital is 10.0%, 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 youestimate 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.)a. Suppose Sora's revenue and free cash flow are expected to grow at a 5.0% rate beyond year four. If Sora's weighted average cost of capital is 10.0%, what is the value of Sora stock based on this information?The stock price for this case is $. (Round to the nearest cent.)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 price for this case, when COGS increases, is $ (Round to the nearest cent.)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 youestimate now? (Assume no other expenses, except taxes, are affected.)The stock price for this case, when selling, general, and administrative costs decrease, is $ . (Round to the nearest cent.)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.)The stock price for this case, when working capital needs are reduced, is S (Round to the nearest cent.)

Sora Industries has 60 million outstanding shares, $120 million in debt, S40 million in cash, and the following proj Year 1 3 4 Earnings and FCF Forecast ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0%

Sora Industries has 60 million outstanding shares, $120 million in debt, S40 million in cash, and the following proj Year 1 3 4 Earnings and FCF Forecast ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0%

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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