Reverse Engineering Valuation Model to Determine Assumptions Refer to Home Depot information in E14-22 to answer the requirements.

a. Estimate the value of a share of Home Depot’s common stock using the residual operating income

(ROPI) model as of January 31, 2016.

b. Home Depot (HD) stock closed at $130.46 on March 24, 2016. For each of the following assumptions, determine the value that supports the stock price. (????int???? Use the What-if-Analysis in Excel.)

• Weighted average cost of capital

• Terminal growth rate

c. Determine the NOPM and NOAT implicit in the horizon and terminal period forecasts of NOPAT and NOA.

d. Prepare a sensitivity analysis of Home Depot’s stock price for changes in NOPM and NOAT. Vary both of these assumptions (up and down) by 10% in 5% increments (and round to three decimal places). Which assumption has more impact on Home Depot’s estimated stock price? (????int???? See Exhibit 13.6 for guidance on sensitivity analysis to NOPM and NOAT.)