Estimating Share Value Using the ROPI Model Following are forecasts of Illinois Tool Works Inc. sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 31, 2018.

	Reported	Horizon Period
$ millions	2018	2019	2020	2021	2022	Terminal Period
Sales	$14,768	$15,654	$16,593	$17,589	$18,644	$19,017
NOPAT	2,711	2,880	3,053	3,236	3,430	3,499
NOA	9,462	10,028	10,630	11,268	11,944	12,183

Answer the following requirements assuming a discount rate (WACC) of 7.35%, a terminal period growth rate of 2%, common shares outstanding of 328.1 million, and net nonoperating obligations (NNO) of $6,204 million. (a) Estimate the value of a share of ITW's common stock using the residual operating income model (ROPI) model as of December 31, 2018.

Instructions:

Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share.

• Round discount factors to 5 decimal places.
• Round stock price per share to two decimal places.
• Do not use negative signs with any of your answers.

	Reported	Horizon Period
($ millions)	2018	2019	2020	2021	2022	Terminal Period
ROPI (NOPAT - [NOABeg rw])
Discount factor [1 / (1 + rw)t ]
Present value of horizon ROPI
Cumm present value of horizon ROPI
Present value of terminal ROPI
NOA
Total firm value
NNO
Firm equity value
Shares outstanding (millions)
Stock price per share

(b) Illinois Tool Works Inc. closed at $144.21 on February 15, 2019, 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?

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

Our stock price estimate is only slightly higher than the ITW's market price, indicating that we believe that ITW stock is accurately priced.

Our stock price estimate is much higher than the ITW's market price, indicating that we believe that ITW stock is 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 optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is lower than the ITW's market price, indicating that we believe that ITW stock is 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.