Year 0 1 2 3 4 Earning and FCF Forecast ($ million) Sales 433 468 516 547 574.3 Growth Versus Prior Year 0.081 0.103 0.06 0.05 Cost of Goods Sold -313.56 -345.72 -366.49 -384.78 Gross Profit 154.44 170.28 180.51 189.52 Selling, General, and Administrative -93.6 -103.2 -109.4 -114.86 Depreciation -7 -7.5 -9 -9.5 EBIT 53.84 59.58 62.11 65.16 Less: Income Tax at 25% -13.46 -14.9 -15.53 -16.29 Plus: Depreciation 7 7.5 9 9.5 Less: Capital Expenditures -7.7 -10 -9.9 -10.4 Less: Increase in NWC -6.3 -8.64 -5.58 -4.91 Free Cash Flow 33.38 33.55 40.1 43.055 Sora Industries has 61 million outstanding shares, $122 million in debt, $53 million in cash, and the following projected free cash flow for the next four years: . a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.2% rate beyond year four. If Sora's weighted average cost of capital is 12.0%, 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.)

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter4: Analysis Of Financial Statements

Section: Chapter Questions

Problem 24P: Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales 795.0 Cost of...

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Year	0	1	2	3	4
Earning and FCF Forecast ($ million)
Sales	433	468	516	547	574.3
Growth Versus Prior Year		0.081	0.103	0.06	0.05
Cost of Goods Sold		-313.56	-345.72	-366.49	-384.78
Gross Profit		154.44	170.28	180.51	189.52
Selling, General, and Administrative		-93.6	-103.2	-109.4	-114.86
Depreciation		-7	-7.5	-9	-9.5
EBIT		53.84	59.58	62.11	65.16
Less: Income Tax at 25%		-13.46	-14.9	-15.53	-16.29
Plus: Depreciation		7	7.5	9	9.5
Less: Capital Expenditures		-7.7	-10	-9.9	-10.4
Less: Increase in NWC		-6.3	-8.64	-5.58	-4.91
Free Cash Flow		33.38	33.55	40.1	43.055

Sora Industries has 61 million outstanding shares, $122 million in debt, $53 million in cash, and the following projected free cash flow for the next four years:

a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.2% rate beyond year four. If Sora's weighted average cost of capital is 12.0%, 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.)

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