Estimating Share Value Using the ROPI Model

Following are forecasts of sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 31, 2016, for Wal-Mart Stores, Inc.

	Reported	Horizon Period
$ millions	2016	2017	2018	2019	2020	Terminal Period
Sales	$482,130	$486,951	$491,821	$496,739	$501,706	$506,723
NOPAT	16,634	17,043	17,214	17,386	17,560	17,735
NOA	124,940	126,186	127,448	128,722	130,009	131,309

Answer the following requirements assuming a discount rate (WACC) of 7%, a terminal period growth rate of 1%, common shares outstanding of 3,144 million, net no noperating obligations (NNO) of $41,329 million, and non controlling interest (NCI) on the balance sheet of $3,065 million. (a) Estimate the value of a share of Walmart common stock using the residual operating income (ROPI) model as of January 31, 2016.

Rounding Instructions:

• Round your answer to the nearest whole number except for the discount factors and the stock price per share.

• Round the discount factors to five decimal places and the stock price to two decimal places.

  • Use your rounded answers for subsequent calculations.

    	Reported	Forecast Horizon
    WMT ($ millions)	2016	2017	2018	2019	2020	Terminal Period
    ROPI (NOPAT - [NOABeg rw])
    Discount factor [1/(1+rw)t]	(round 5 decimal places)
    Present value of horizon ROPI
    Cumulative present value of horizon ROPI
    Present value of terminal ROPI
    NOA
    Total firm value
    NNO
    NCI
    Firm equity value
    Shares outstanding (millions)
    Stock price per share		(round two decimal places)

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

b)Walmart (WMT) stock closed at $68.80 on March 30, 2016, the date the 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference? Choose one:

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

- Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly 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.

- Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT 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.