Before Amazons bid for WFM on June 15, 2017, WFMs stock was selling at $33.06 per share. Use your WACC estimate and the cash flow projections in Exhibit 4 to determine the terminal growth rate (g) for all years beyond 2021 that is reflected in a price of $33.06 per share. a. Is this a reasonable growth rate g? b. It is possible that WFMs cash flow projections are overly optimistic. Suppose investors believed that each of WFMs cash flow projections should be reduced by 12%. What growth rate g would be implied by a stock price of $33.06 per share?

Using the WACC from Q3 and the growth rate estimate from Q4a, consider Exhibit 5. What percentage increase in revenue growth from 2017-2021 would justify an offer price of $42.00 per share? Alternatively, what percentage decrease in costs from 2017-2021 would justify an offer price of $42.00 per share?

Exhibit 4: Whole Foods Projected Cash Flows and Valuation* g = Terminal Growth Rate k = Discount Rate Price per Share 5.00% (For your analysis, please insert your own estimates of 10.00% k and g.) $33.301 2017 15887 2018 16490 2019 17339 15683 Actual 2016* 15724 14547 320 857 2020 18217 16402 2021 19238 17289 634 15159 14671 506 551 Net Income Projections Revenue Less: Costs (SGA and COGS) Less: Depreciation and Amortization Operating income Less: Interest expense Income before taxes Less: Income Taxes Net income 585 528 803 710 1105 1230 1315 30 39 27 14 33 770 671 1078 827 320 507 18 1212 473 1301 507 262 409 300 470 420 658 739 794 2018 470 528 2019 658 2020 739 585 18 2021 794 634 551 33 2017 409 506 39 954 370 260 324 Cash Flow Calculations: Net Income Add: Depreciation Add: Interest Expense Operating Cash Flow Less: Capital Expenditures Less: Changes in Net Working Capital Free Cash Flow Terminal Value FCF + Terminal Value 14 1442 27 1236 340 1342 1031 343 266 367 237 402 226 257 422 639 738 814 17094 324 422 639 738 17908 Enterprise Value and Calculation of Per-Share Price: Enterprise Value 12747 Less: Debt Obligations 2107 Equity Value 10640 Shares Outstanding 319.5 Price per Share $33.30 Exhibit 5: Whole Foods Projected Cash Flows and Valuation to Amazon* g = Terminal Growth Rate k = Discount Rate Additional ST Revenue Growth Decrease in Costs % of total) Price per Share 4.00% 10.00% (For your analysis, please insert your own estimates for the 15.00% yellow-highlighted cells.) 0.00% $35 20 Actual 2016* 15724 2017 2021 2019 19940 2020 20950 18270 22124 2018 18964 17433 528 14547 320 16872 506 18035 551 18862 585 19882 634 Net Income Projections Revenue Less: Costs (SGA and COGS) Less: Depreciation and Amortization Operating income Less: Interest expense Income before income taxes Less: Income Taxes Net income 857 892 1353 1502 1607 1003 33 30 39 27 18 14 827 853 970 1484 1593 1326 517 320 333 378 579 621 972 507 520 592 810 905 2019 2021 2017 520 2018 592 2020 905 810 972 506 528 551 585 634 39 33 27 18 14 1065 1153 1508 Cash Flow Calculations: Net Income Add: Depreciation Add: Interest Expense Operating Cash Flow Less: Capital Expenditures Less: Changes in Net Working Capital Free Cash Flow Terminal Value FCF + Terminal Value 1388 340 370 343 367 1620 402 226 260 266 257 237 435 544 791 904 992 17202 435 544 791 904 18194 Enterprise Value and Calculation of Per-Share Price: Enterprise Value 13354 Less: Debt Obligations 2107 Equity Value 11247 Shares Outstanding 319.5 Price per Share $35.20 Exhibit 4: Whole Foods Projected Cash Flows and Valuation* g = Terminal Growth Rate k = Discount Rate Price per Share 5.00% (For your analysis, please insert your own estimates of 10.00% k and g.) $33.301 2017 15887 2018 16490 2019 17339 15683 Actual 2016* 15724 14547 320 857 2020 18217 16402 2021 19238 17289 634 15159 14671 506 551 Net Income Projections Revenue Less: Costs (SGA and COGS) Less: Depreciation and Amortization Operating income Less: Interest expense Income before taxes Less: Income Taxes Net income 585 528 803 710 1105 1230 1315 30 39 27 14 33 770 671 1078 827 320 507 18 1212 473 1301 507 262 409 300 470 420 658 739 794 2018 470 528 2019 658 2020 739 585 18 2021 794 634 551 33 2017 409 506 39 954 370 260 324 Cash Flow Calculations: Net Income Add: Depreciation Add: Interest Expense Operating Cash Flow Less: Capital Expenditures Less: Changes in Net Working Capital Free Cash Flow Terminal Value FCF + Terminal Value 14 1442 27 1236 340 1342 1031 343 266 367 237 402 226 257 422 639 738 814 17094 324 422 639 738 17908 Enterprise Value and Calculation of Per-Share Price: Enterprise Value 12747 Less: Debt Obligations 2107 Equity Value 10640 Shares Outstanding 319.5 Price per Share $33.30 Exhibit 5: Whole Foods Projected Cash Flows and Valuation to Amazon* g = Terminal Growth Rate k = Discount Rate Additional ST Revenue Growth Decrease in Costs % of total) Price per Share 4.00% 10.00% (For your analysis, please insert your own estimates for the 15.00% yellow-highlighted cells.) 0.00% $35 20 Actual 2016* 15724 2017 2021 2019 19940 2020 20950 18270 22124 2018 18964 17433 528 14547 320 16872 506 18035 551 18862 585 19882 634 Net Income Projections Revenue Less: Costs (SGA and COGS) Less: Depreciation and Amortization Operating income Less: Interest expense Income before income taxes Less: Income Taxes Net income 857 892 1353 1502 1607 1003 33 30 39 27 18 14 827 853 970 1484 1593 1326 517 320 333 378 579 621 972 507 520 592 810 905 2019 2021 2017 520 2018 592 2020 905 810 972 506 528 551 585 634 39 33 27 18 14 1065 1153 1508 Cash Flow Calculations: Net Income Add: Depreciation Add: Interest Expense Operating Cash Flow Less: Capital Expenditures Less: Changes in Net Working Capital Free Cash Flow Terminal Value FCF + Terminal Value 1388 340 370 343 367 1620 402 226 260 266 257 237 435 544 791 904 992 17202 435 544 791 904 18194 Enterprise Value and Calculation of Per-Share Price: Enterprise Value 13354 Less: Debt Obligations 2107 Equity Value 11247 Shares Outstanding 319.5 Price per Share $35.20