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 February 26, 2011, for Best Buy, Inc. Refer to the information in the table to answer the following requirements. Assume Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period Sales $40.023 $44,577 549,650 $55,300 $61,592 $62,208 NOPAT 1,448 1.637 1,808 2,014 2.224 2.257 NOA 5,287 5.893 6,539 7.282 8,140 8,193 Answer the following requirements assuming a discount rate (WACC) of 11%, a terminal period growth rate of 196, common shares outstanding of 410.5 million, net nonoperating obligations (NNO) of $801 million and noncontrolling interest (NCI) on the balance sheet of $690 million. (a) Estimate the value of a share of Best Buy common stock using the residual operating income (ROPI) model as of February 26, 2011. Rounding Instructions: Round your answer to the nearest whole number except for the discount factors, shares outstanding, and the stock price per share. Round the discount factors to five decimal places, common shares outstanding to one decimal place, and the stock price to two decimal places. Use your rounded answers for subsequent calculations. Do not use negative signs with any of your answers below. Assume Reported (In millions) 2011 ROPI (NOPAT - [NOABeg rw]) 0 Discount factor [1/(1+rw)t] (round 5 decimal places) Present value of horizon ROPI Horizon Period 2013 2012 2014 2015 Terminal Period 0 0 0 0 0 O O O 0 O O O 0 0 0 3,776 Cum present value of horizon ROPI $ Present value of terminal ROPI 0 NOA 0 Total firm value 0 0 NNO NCI o oo ooo oo 0 $ 0 Firm equity value Shares outstanding (millions) Stock price per share 0 (round one decimal place) 0 (round two decimal places) $ (b) Assume Best Buy (BBY) stock closed at $43.47 on April 1, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference? Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY 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. Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY stock is overvalued. 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions. OStock prices are a function of many factors. It is impossible to speculate on the reasons for the difference. Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY stock is overvalued. 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
