Estimating Share Value Using the DCF Model Following are forecasts of sales, net

Question

Estimating Share Value Using the DCF Model

Following are forecasts of sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of February 26, 2011, for Best Buy, Inc.

Answer the following requirements assuming a discount rate (WACC) of 11%, a terminal period growth rate of 1%, common shares outstanding of 392.6 million, net nonoperating obligations (NNO) of $1,274 million and noncontrolling interest (NCI) on the balance sheet of $690 million.

(a) Estimate the value of a share of Best Buy's common stock using the residual operating income (ROPI) model as of February 26, 2011.

Rounding instructions:

Round your answer to the nearest whole number except for the discount factors, shares outstanding, and the stock price per share.

Round the discount factors to five decimal places, common shares outstanding to one decimal place, and the stock price to two decimal places.

Use your rounded answers for subsequent calculations.

Do not use negative signs with any of your answers below.

Assume
Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period Sales $50,272 $52,786 $55,425 $58,196 $61,106 $61,717 NOPAT 1,389 1,584 1,663 1,746 1,833 1,852 NOA 7,876 8,248 8,660 9,093 9,548 9,643

Explanation / Answer

Assume Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period ROPI $717.64 $755.72 $793.4 $832.77 801.72 ROPI (NOPAT - [NOA Beg × rw ]) Discount factor [1/(1+rw)t] 0.90090 0.81162 0.73119 0.65873 Present value of horizon ROPI $646.52 $613.36 $580.13 $548.57 Cumulative present value of horizon ROPI $2,388.58 Present value of terminal ROPI ($801.72/(11%-1%)/(1.11)^4 $5,281.18 Total firm value $7,669.76 Less NNO $1,274 Less NCI $690 Firm equity value $5,705.76 Shares outstanding (millions) 392.6 Stock price per share $14.53

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