Estimating Share Value Using the DCF Model

Following are forecasted sales, NOPAT, and NOA for Texas Roadhouse for 2016 through 2019.

a. Forecast the terminal period values assuming a 1% terminal period growth rate for all three model inputs: Sales, NOPAT, and NOA.

Round your answers to the nearest dollar.

Reported Forecast Horizon Terminal

$ thousands 2015 2016 2017 2018 2019 Period

Sales $1,807,368 $2,078,473 $2,390,244 $2,581,464 $2,787,981

NOPAT 102,495 170,435 196,000 211,680 228,614

NOA 662,502 761,904 876,189 946,284 1,021,987

b. Estimate the value of a share of TXRH common stock using the discounted cash flow (DCF) model as of December 29, 2015; assume a discount rate (WACC) of 7%, common shares outstanding of 70,091 thousand, net nonoperating obligations (NNO) of $(14,680) thousand, and noncontrolling interest (NCI) from the balance sheet of $7,520 thousand. Note that NNO is negative because the companys cash exceeds its nonoperating liabilities.

Rounding instructions:

Use rounded answers for subsequent computations.

Round answers to the nearest whole number unless otherwise noted.

Round discount factor to 5 decimal places and stock price per share to two decimal places.

Use a negative sign with your negative NNO answer. Otherwise, do not use negative signs with your answers.

TXRH Forecast Horizon Terminal

$ thousands 2016 2017 2018 2019 Period

Increase in NOA

FCFF (NOPAT - Increase in NOA)

Discount factor [1 / (1 + rw)t ]

Present value of horizon FCFF

Cum PV of horizon FCFF

Present value of terminal FCFF

Total firm value

NNO

NCI

Firm equity value

Shares outstanding (thousands)

Stock price per share

c. TXRH closed at $42.13 on February 26, 2016, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price?

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

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

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

d. If WACC had been 7.5%, what would the valuation estimate have been? What about if WACC has been 6.5%?

The valuation estimate at 7.5% would be lower than the estimate calculated in part a because the discount rate increased. In contrast, the valuation estimate at 6.5% would be higher than our estimate.

The valuation estimate at 7.5% would be higher than the estimate calculated in part a because the discount rate increased. In contrast, the valuation estimate at 6.5% would be lower than our estimate.

The valuation estimate would be the same regardless of the rate used to compute the estimate.