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Estimating Share Value Using the DCF Model Assume following are forecasts of Abercrombie & Fitch's sales, net operating profit after tax (NOPAT), and net operating

Estimating Share Value Using the DCF Model Assume following are forecasts of Abercrombie & Fitch's sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 29, 2011.

Reported Horizon Period
(In millions) 2011 2012 2013 2014 2015 Terminal Period
Sales $ 3,750 $ 4,500 $ 5,400 $ 6,480 $ 7,776 $ 7,853
NOPAT 464 539 654 794 982 960
NOA 1,320 1,602 1,933 2,332 2,791 2,802

Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating obligations (NNO) of $(261) million (negative NNO reflects net nonoperating assets such as investments rather than net obligations). (a) Estimate the value of a share of Abercrombie & Fitch common stock using the discounted cash flow (DCF) model as of January 29, 2011.

Rounding instructions:

  • Round answers to the nearest whole number unless noted otherwise.

  • Use your rounded answers for subsequent calculations.

Do not use negative signs with any of your answers.

Reported Horizon Period
(In millions) 2011 2012 2013 2014 2015 Terminal Period
Increase in NOA Answer Answer Answer Answer Answer
FCFF (NOPAT - Increase in NOA) Answer Answer Answer Answer Answer
Discount factor [1 / (1 + rw)t ] (round to 5 decimal places) Answer Answer Answer Answer
Present value of horizon FCFF Answer Answer Answer Answer
present value of horizon FCFF Answer
Present value of terminal FCFF Answer
Total firm value Answer
NNO Answer
Firm equity value Answer
Shares outstanding (millions) Answer (round one decimal place)
Stock price per share Answer (round two decimal places)

(b) Assume Abercrombie & Fitch (ANF) stock closed at $77.56 on March 2, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference?

Our stock price estimate is lower than the ANF market price, indicating that we believe that ANF stock is undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our lower stock price estimate might be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.

Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.

Our stock price estimate is lower than the ANF market price, indicating that we believe that ANF stock is overvalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our lower stock price estimate might be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is lower than the ANF market price, indicating that we believe that ANF stock is overvalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our lower stock price estimate might be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.

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