Sora Industries has 60 million outstanding shares, $128 million in debt, $48 mil
ID: 2793324 • Letter: S
Question
Sora Industries has 60 million outstanding shares, $128 million in debt, $48 million in cash, and the following projected free cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ 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%
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
7.0
7.5
9.0
9.5
10
Less: Capital Expenditures
(7.7)
(10.0)
(9.9)
(10.4)
11
Less: Increase in NWC
(6.3)
(8.6)
(5.6)
(4.9)
12
Free Cash Flow
25.3
24.6
30.83
33.3
a. Suppose Sora's revenue and free cash flow are expected to grow at a 5.6% 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 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.)
Year
0
1
2
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%
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
7.0
7.5
9.0
9.5
10
Less: Capital Expenditures
(7.7)
(10.0)
(9.9)
(10.4)
11
Less: Increase in NWC
(6.3)
(8.6)
(5.6)
(4.9)
12
Free Cash Flow
25.3
24.6
30.83
33.3
Explanation / Answer
A / 1 B C D E F G H I J K 2 Year - 1 2 3 4 Yr5 on wards 3 Earnings and FCF Forecast ($ million) 4 1 Sales 433.00 468.00 516.00 547.00 574.30 606.46 5 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 5.60% 6 3 Cost of Goods Sold (313.60) (345.70) (366.50) (384.80) 7 4 Gross Profit 154.40 170.30 180.50 189.50 8 5 Selling, General, & Admin. (93.60) (103.20) (109.40) (114.90) 9 6 Depreciation (7.00) (7.50) (9.00) (9.50) 10 7 EBIT 53.80 59.60 62.10 65.20 11 8 Less: Income Tax at 40% (21.50) (23.80) (24.80) (26.10) 12 9 Plus: Depreciation 7.00 7.50 9.00 9.50 13 10 Less: Capital Expenditures (7.70) (10.00) (9.90) (10.40) 14 11 Less: Increase in NWC (6.30) (8.60) (5.60) (4.90) 15 12 Free Cash Flow 25.30 24.60 30.83 33.30 35.16 16 WACC 10% 10% 10% 10% 10% 17 Discounted FCF 23.00 22.36 28.03 30.27 524.03 =(J15*(1+J5)/(J16-J5))/(1+J16)^5 18 19 a) 20 Discounted Present Value per Equity Share $ Mn 21 Discounted Present Value for 1 to 4 years 103.66 =SUM(F17:I17) 22 Discounted Present Value for the perpetuity 524.03 23 Total Value of the Company 627.69 24 Less: Debt 128.00 25 Value for Equity Shareholders 499.69 26 Number of outstanding Equity Shares 60,000,000 27 Value per Equity Share (in $) 8.33 28 29 30 b) If cost of goods sold is 70% of sales 31 Year - 1 2 3 4 Yr5 on wards 32 Earnings and FCF Forecast ($ million) 33 1 Sales 433.00 468.00 516.00 547.00 574.30 606.46 34 2 Growth vs. Prior Year 8.10% 10.30% 6% 5% 5.60% 35 3 Cost of Goods Sold (327.60) (361.20) (382.90) (402.01) 36 4 Gross Profit 140.40 154.80 164.10 172.29 37 5 Selling, General, & Admin. (93.60) (103.20) (109.40) (114.90) 38 6 Depreciation (7.00) (7.50) (9.00) (9.50) 39 7 EBIT 39.80 44.10 45.70 47.89 40 8 Less: Income Tax at 40% (15.90) (17.60) (18.30) (19.20) 41 9 Plus: Depreciation 7.00 7.50 9.00 9.50 42 10 Less: Capital Expenditures (7.70) (10.00) (9.90) (10.40) 43 11 Less: Increase in NWC (6.30) (8.60) (5.60) (4.90) 44 12 Free Cash Flow 16.90 15.40 20.90 22.89 24.17 45 WACC 10% 10% 10% 10% 10% 46 Discounted FCF 15.36 14.00 19.00 20.81 360.21 47 48 49 Discounted Present Value per Equity Share $ Mn 50 Discounted Present Value for 1 to 4 years 69.17 51 Discounted Present Value for the perpetuity 360.21 52 Total Value of the Company 429.38 53 Less: Debt 128.00 54 Value for Equity Shareholders 301.38 55 Number of outstanding Equity Shares 60,000,000 56 Value per Equity Share (in $) 5.02 57 58 c) If selling and general admin expenses are reduced to 16% of sales and remaining assumptions as per scenario A. 59 Year - 1 2 3 4 Yr5 on wards 60 Earnings and FCF Forecast ($ million) 61 1 Sales 433.00 468.00 516.00 547.00 574.30 606.46 62 2 Growth vs. Prior Year 8.10% 10.30% 6% 5% 5.60% 63 3 Cost of Goods Sold (313.60) (345.70) (366.50) (384.80) 64 4 Gross Profit 154.40 170.30 180.50 189.50 65 5 Selling, General, & Admin. (74.88) (82.56) (87.52) (91.89) 66 6 Depreciation (7.00) (7.50) (9.00) (9.50) 67 7 EBIT 72.52 80.24 83.98 88.11 68 8 Less: Income Tax at 40% (29.00) (32.10) (33.60) (35.20) 69 9 Plus: Depreciation 7.00 7.50 9.00 9.50 70 10 Less: Capital Expenditures (7.70) (10.00) (9.90) (10.40) 71 11 Less: Increase in NWC (6.30) (8.60) (5.60) (4.90) 72 12 Free Cash Flow 36.52 37.04 43.88 47.11 49.75 73 WACC 10% 10% 10% 10% 10% 74 Discounted FCF 33.20 33.67 39.89 42.83 741.38 75 76 77 Discounted Present Value per Equity Share $ Mn 78 Discounted Present Value for 1 to 4 years 149.59 79 Discounted Present Value for the perpetuity 741.38 80 Total Value of the Company 890.98 81 Less: Debt 128.00 82 Value for Equity Shareholders 762.98 83 Number of outstanding Equity Shares 60,000,000 84 Value per Equity Share (in $) 12.72 85 86 d) If net working capital is reduced to 12% of sales and remaining assumptions as per scenario A. 87 Year - 1 2 3 4 Yr5 on wards 88 Earnings and FCF Forecast ($ million) 89 1 Sales 433.00 468.00 516.00 547.00 574.30 606.46 90 2 Growth vs. Prior Year 8.10% 10.30% 6% 5% 5.60% 91 3 Cost of Goods Sold (313.60) (345.70) (366.50) (384.80) 92 4 Gross Profit 154.40 170.30 180.50 189.50 93 5 Selling, General, & Admin. (93.60) (103.20) (109.40) (114.90) 94 6 Depreciation (7.00) (7.50) (9.00) (9.50) 95 7 EBIT 53.80 59.60 62.10 65.10 96 8 Less: Income Tax at 40% (21.50) (23.80) (24.80) (26.00) 97 9 Plus: Depreciation 7.00 7.50 9.00 9.50 98 10 Less: Capital Expenditures (7.70) (10.00) (9.90) (10.40) 99 11 Less: (Increase)/decrease in NWC 21.78 (5.76) (3.72) (3.28) 100 12 Free Cash Flow 53.38 27.54 32.68 34.92 36.88 101 WACC 10% 10% 10% 10% 10% 102 Discounted FCF 48.53 25.04 29.71 31.75 549.59 103 Net working capital 77.94 56.16 61.92 65.64 68.92 104 105 Discounted Present Value per Equity Share $ Mn 106 Discounted Present Value for 1 to 4 years 135.02 107 Discounted Present Value for the perpetuity 549.59 108 Total Value of the Company 684.61 109 Less: Debt 128.00 110 Value for Equity Shareholders 556.61 111 Number of outstanding Equity Shares 60,000,000 112 Value per Equity Share (in $) 9.28 113
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