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 ( see MyFinanceLab for the data in Excel format ):

 

1	Year	0	1	2	3	4
2	Earnings and FCF Forecast ($ million)	Â	Â	Â	Â	Â
3	Sales	433.0	468.0	516.0	547.0	574.3
4	Growth versus Prior Year	Â	8.1%	10.3%	6.0%	5.0%
5	Cost of Goods Sold	Â	313.6	345.7	366.5	384.8
6	Gross Profit	Â	154.4	170.3	180.5	189.5
7	Selling, General, and Administrative	Â	93.6	103.2	109.4	114.9
8	Depreciation	Â	7.0	7.5	9.0	9.5
9	EBIT	Â	53.8	59.6	62.1	65.2
10	Less: Income Tax at 40%	Â	21.5	23.8	24.8	26.1
11	Plus: Depreciation	Â	7.0	7.5	9.0	9.5
12	Less: Capital Expenditures	Â	7.7	10.0	9.9	10.4
13	Less: Increase in NWC	Â	6.3	8.6	5.6	4.9
14	Free Cash Flow	Â	25.3	24.6	30.8	33.3

 

a. Suppose Sora’s revenues and free cash flow are expected to grow at a 5% rate beyond year 4. If Sora’s weighted average cost of capital is 10%, what is the value of Sora’s 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 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 effect on Sora’s free cash flow in year 1.