Estimating Share Value Using the DCF Model

Following are the income statement and balance sheet for Texas Roadhouse for the year ended December 29, 2015.

a. Assume the following forecasts for TXRH's sales, NOPAT, and NOA for 2016 through 2019. 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.

ReportedForecast HorizonTerminal$ thousands20152016201720182019PeriodSales$1,807,368$2,078,473$2,390,244$2,581,464$2,787,981$Answer

NOPAT102,495170,435196,000211,680228,614$Answer

NOA662,502761,904876,189946,2841,021,987$Answer

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 company's 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.

Do not use negative signswith any of your answers below.

TXRHReportedForecast HorizonTerminal$ thousands20152016201720182019PeriodIncrease in NOA$Answer

$Answer

$Answer

$Answer

$Answer

FCFF (NOPAT - Increase in NOA)Answer

Answer

Answer

Answer

Answer

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

Answer

Answer

Answer

Present value of horizon FCFFAnswer

Answer

Answer

Answer

Cum PV of horizon FCFF$Answer

Present value of terminal FCFFAnswer

Total firm valueAnswer

NNOAnswer

NCIAnswer

Firm equity value$Answer

Shares outstanding (thousands)Answer

Stock price per share$Answer

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 WMT market price, indicating that we believe that WMT 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 thanthe 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 theestimate.