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 TXRHs 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.

	Reported	Forecast Horizon				Terminal
$ thousands	2015	2016	2017	2018	2019	Period
Sales	$1,807,368	$2,105,584	$2,453,005	$2,661,510	$2,887,738	Answer
NOPAT	102,495	172,658	201,146	218,244	236,795	Answer
NOA	662,502	771,842	899,195	975,627	1,058,555	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 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.

Do not use negative signs with any of your answers below.

TXRH	Reported			Forecast Horizon		Terminal
$ thousands	2015	2016	2017	2018	2019	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 ]		Answer	Answer	Answer	Answer
Present value of horizon FCFF		Answer	Answer	Answer	Answer
PV of horizon FCFF	Answer
Present value of terminal FCFF	Answer
Total firm value	Answer
NNO	Answer
NCI	Answer
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 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.