Estimating Share Value Using the ROPI Model Assume the following are the income statement and balance sheet for CVS Caremark.

CVS CAREMARK INC. Consolidated Statements of Income Year Ended December 31 (In millions) 2010 2009 2008 Net revenues $ 98,613 $ 98,729 $ 87,472 Cost of revenues 76,256 78,349 69,182 Gross profit 22,357 20,380 18,290 Operating expenses 14,092 13,942 12,244 Operating profit 8,265 6,438 6,046 Interest expense, net 536 525 509 Income before income tax provision 7,729 5,913 5,537 Income tax provision 2,190 2,205 2,193 Income from continuing operations 5,539 3,708 3,344 Loss from discontinued operations, net of taxes (15) (12) (132) Net income 5,524 3,696 3,212 Net loss attributable to noncontrolling interest 3 -- -- Preference dividends, net of income tax benefit -- -- (14) Net income attributable to CVS Caremark $ 5,527 $ 3,696 $ 3,198

CVS CAREMARK INC. Balance Sheets December 31 (In millions, except per share value) 2010 2009 Assets Cash and cash equivalents $ 2,227 $ 1,086 Short-term investments 4 5 Accounts receivables, net 5,025 5,457 Inventories 11,695 10,343 Deferred tax assets 711 506 Other current assets 144 140 Total current assets 19,806 17,537 Propertyand equipment, net 8,322 7,923 Goodwill 25,669 25,680 Intangible assets, net 9,784 10,127 Other assets 688 374 Total assets $64,269 $61,641 Liabilities Accounts payable $4,026 $3,560 Claims and discounts payable 2,569 3,075 Accrued expenses 3,070 3,246 Short-term debt 300 315 Current portion of long-term debt 1,105 2,104 Total current liabilities 11,070 12,300 Long-term debt 8,652 8,756 Deferred income taxes 3,655 3,678 Other long-term liabilities 1,058 1,102 Redeemable noncontrolling interest 34 37 Total liabilities 24,469 25,873 Shareholders' equity: Common stock, $0.01 par value, 3,200 shares authorized; 1,624 issued and 1,363 outstanding at December 31, 2010 16 16 Treasury stock at cost (9,030) (7,610) Shares held in trust (56) (56) Capital surplus 27,610 27,198 Retained earnings 21,403 16,355 Accumulated other comprehensive loss (143) (135) Total shareholders' equity 39,800 35,768 Total liabilities and shareholders' equity $ 64,269 $ 61,641

(a) Compute CVS's net operating assets (NOA) as of December 31, 2010. (Hint: Redeemable noncontrolling interest is a nonoperating liability.) 2010 NOA = $Answer (b) Compute net operating profit after tax (NOPAT) for 2010, assuming a federal and state statutory tax rate of 37%.(Round your answer to the nearest whole number.) 2010 NOPAT = $Answer (c) Forecast CVS's sales, NOPAT, and NOA for 2011 through 2014 using the following assumptions:

Sales growth	5%
Net operating profit margin (NOPM)	4%
Net operating asset turnover (NOAT) at fiscal year-end	2.10

Forecast the terminal period value using the assumptions above and assuming a terminal period growth of: 1%.

CVS Reported Forecast Horizon Terminal ($ millions) 2010 2011 Est. 2012 Est. 2013 Est. 2014 Est. Period Sales (rounded two decimal places) $Answer $Answer $Answer $Answer $Answer $Answer Sales (rounded nearest whole number) $Answer $Answer $Answer $Answer $Answer $Answer NOPAT (rounded nearest whole number)* Answer Answer Answer Answer Answer Answer NOA (rounded nearest whole number)* Answer Answer Answer Answer Answer Answer

* Use sales rounded to nearest whole number for this calculation.

(d) Estimate the value of a share of CVS common stock using the residual operating income (ROPI)model as of December 31, 2010; assume a discount rate (WACC) of 7%, common shares outstanding of 1,363 million, and net nonoperating obligations (NNO) of $7,860 million. Use your rounded answers for subsequent calculations.

CVS Reported Forecast Horizon Terminal ($ millions) 2010 2011 Est. 2012 Est. 2013 Est. 2014 Est. Period ROPI Model ROPI [NOPAT - (NOA beg x WACC)] (rounded to nearest whole number) Answer Answer Answer Answer Answer Discount factor (rounded to 5 decimal places) Answer Answer Answer Answer Present value of horizon ROPI (rounded to nearest whole number) Answer Answer Answer Answer Cum present value of horizon ROPI $Answer (rounded to nearest whole number) Present value of terminal ROPI Answer (rounded to nearest whole number) NOA Answer (rounded to nearest whole number) Total firm value Answer (rounded to nearest whole number) Less NNO Answer (rounded to nearest whole number) Firm equity value $Answer (rounded to nearest whole number) Shares outstanding (millions) Answer (rounded to nearest whole number) Stock price per share $Answer (rounded to two decimal places)

(e) CVS's stock closed at $33.06 on February 18, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results? (Select all that apply) AnsweryesnoOur stock price estimate is higher than the CVS market price as of February 18, 2011, indicating that we believe the stock is undervalued. AnsweryesnoStock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. AnsweryesnoOur lower stock price estimate may be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts model assumptions. AnsweryesnoOur higher stock price estimate may be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts model assumptions.