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 December 31, 2018, for Humana. Reported Horizon Period Terminal $ millions 2018 2019 2020 2021 2022 Period Sales $56,912 $57,766 $58,632 $59,512 $60,404 $61,008 NOPAT 2,492 2,542 2,580 2,619 2,658 2,684 NOA 4,097 4,158 4,221 4,284 4,327 4,032 Answer the following requirements assuming a discount rate (WACC) of 7.8%, a terminal period growth rate of 1%, common shares outstanding of 135.6 million, net nonoperating obligations (NNO) of $(6,129) million, which is negative because Humana's nonoperating assets exceed its nonoperating liabilities, and no noncontrolling interest (NCI) on the balance sheet. (a) Estimate the value of a share of common stock using the residual operating income (ROPI) model as of December 31, 2018. Instructions: Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share. , Round discount factors to 5 decimal places. Round stock price per share to two decimal places. Use your rounded answers for subsequent calculations. Use a negative sign with your NNO answer. Reported Forcast Horizon 2018 Terminal Period 2,350 2019 2,228 0.92764 2,066 2020 2,260 0.86052 1,945 2021 2.295 0.79826 1,832 2022 2,329 0.7405 1,724 ($ millions) ROPI (NOPAT - [NOABeg x rw]) Discount factor (1/(1+rw)t] 1 Present value of horizon ROPI Cum 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 $ 7,568 25,589 4,032 37,189 (6,129) 43,318 135.6 319.45 (b) Humana (HUM) stock closed at $307.56 on February 21, 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? Ostock 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 HUM market price, indicating that we believe that HUM 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 slightly higher than the HUM market price, indicating that we believe that HUM stock is slightly undervalued. Stock prices are a function
