7 EBIT 8 Less: Income Tax at 40% 9 Plus: Depreclation 10 Less: Captal Expenditur

Question

7 EBIT 8 Less: Income Tax at 40% 9 Plus: Depreclation 10 Less: Captal Expenditures 11 Less: Increase in NWC 12 Free Cash Flow 62.1 (21.5) (23.8) (24.8) 9.0 53.8 59.6 65.2 7.0 7.5 9.5 (7.7) 10.0)(9.9) 10.4) 4.9) 33.3 (6.3) 25.3 (8.6) 24.6 (5.6) 30.8 a Suppose Sora s revenue and free cash flow are expected to grow at a 4.8% rate beyond year four. If Sora's weighted average cost of capital is 1 1 0%, what is the value of Sora stock based on this information? b. Sores 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 Retum to the assumptions of part a and suppose Sora can maintain its cost of goods sold at 67% of sales. Ho ever, 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. So as not working capital needs were estimated to be 18% o sales their current level in ear zero Sora can reduce this equirement to 12% o 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 yoar 1.)

Explanation / Answer

Stock Price = Value of Equity / No. of Common Stock Outstanding
Value of Equity = Value of Firm - Value of Debt

Value of Firm = Present Value of all future Cash flows + Present value of Terminal Value

Cost of Capital,r = 11%
Growth Rate,g = 4.8 % at terminal
Terminal Value Year 4 (Gordan Model) = FCF5/(r-g) = FCF4*(1+g)/(r-g) = FCF4*1.048/(0.11-0.048) = 16.9032*FCF4

Value of Firm = FCF1/(1+r)1 + FCF2/(1+r)2 + FCF3/(1+r)3 + FCF4/(1+r)4 + TV4/(1+r)4
Value of Firm = FCF1/1.111 + FCF2/1.112 + FCF3/1.113 + FCF4/1.114 + TV4/1.114

a)
FCF1 = 25.3
FCF2 = 24.6
FCF3 = 30.8
FCF4 = 33.3
TV4 = 16.9032*FCF4 = 16.9032*33.3 = 562.87

Value of Firm = 25.3/1.111 + 24.6/1.112 + 30.8/1.113 + 33.3/1.114 + 562.87/1.114
Value of Firm = 458
Value of Debt = 130
Value of Equity = 458 - 130 = 328
Stock Price = 328/66 = $ 4.97

b)
With Increase COGS = FCF will be down by extra cost of 3% of sales (net of taxes)
FCF1 = 25.3 - 3%*468(1-40%) = 16.876
FCF2 = 24.6 - 3%*516(1-40%) = 15.312
FCF3 = 30.8 - 3%*547(1-40%) = 20.954
FCF4 = 33.3 - 3%*574.3(1-40%) = 22.963
TV4 = 16.9032*FCF4 = 16.9032*22.963 = 388.142

Value of Firm = 16.876/1.111 + 15.312/1.112 + 20.954/1.113 + 22.963/1.114 + 388.142/1.114
Value of Firm = 313.76
Value of Debt = 130
Value of Equity = 313.76 - 130 = 183.68
Stock Price = 183.76/66 = $ 2.78

c)
With Decrease SG&A = FCF will be up by lower cost of 4% of sales (net of taxes)
FCF1 = 25.3 + 4%*468(1-40%) = 36.532
FCF2 = 24.6 + 4%*516(1-40%) = 36.984
FCF3 = 30.8 + 4%*547(1-40%) = 43.928
FCF4 = 33.3 + 4%*574.3(1-40%) = 47.083
TV4 = 16.9032*FCF4 = 16.9032*47.083 = 795.86

Value of Firm = 36.532/1.111 + 36.984/1.112 + 43.928/1.113 + 47.083/1.114 + 795.86/1.114
Value of Firm = 650.24
Value of Debt = 130
Value of Equity = 650.24 - 130 = 520.24
Stock Price = 520.24/66 = $ 7.88

d)
With Decrease Working Capital = FCF will be up by lower working capital of 6% of Increase in Sales
FCF1 = 25.3 + 6%*(468-433) = 27.40
FCF2 = 24.6 + 6%*(516-468) = 27.48
FCF3 = 30.8 + 6%*(547-516) = 32.66
FCF4 = 33.3 + 6%*(574.3-547) = 34.94
TV4 = 16.9032*FCF4 = 16.9032*34.94 = 590.56

Value of Firm = 27.40/1.111 + 27.48/1.112 + 32.66/1.113 + 34.94/1.114 + 590.56/1.114
Value of Firm = 482.91
Value of Debt = 130
Value of Equity = 482.91 - 130 = 352.91
Stock Price = 352.91/66 = $ 5.35

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.