Estimating Share Value Using the ROPI Model The following are forecasts of Abercrombie & Fitch's sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 29, 2011. Refer to the information in the table to answer the following requirements. Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Sales $3,469 $ 3,989 $ 4,587 $5,275 $ 6,066 NOPAT 152 319 367 422 485 NOA 1,032 1,173 1,349 1,551 1,784 Terminal Period $ 6,187 495 1,820 Answer the following requirements assuming a discount rate (WACC) of 10%, a terminal period growth rate of 2%, common shares outstanding of 87.2 million, and net nonoperating obligations (NNO) of $(858) million. (Negative NNO reflects net nonoperating assests such as investments rather than net obligations) (a) Estimate the value of a share of Abercrombie & Fitch common stock using the residual operating income (ROPI) model as of January 29, 2011. Rounding instructions: Round answers to the nearest whole number unless noted otherwise. Use your rounded answers for subsequent calculations. Do not use negative signs with any of your answers. Horizon Period 2013 2012 2014 2015 Terminal Period Reported (In millions) 2011 ROPI (NOPAT - [NOABeg xrw]) Discount factor [1/(1+rw)'] (round 5 decimal places) 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 (round one decimal place) (round two decimal places) (b) Assume Abercrombie & Fitch (ANF) stock closed at $56.71 on March 29, 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 ANF market price, indicating that we believe that ANF 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 higher than the ANF market price, indicating that we believe that ANF stock is 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 lower than the ANF market price, indicating that we believe that ANF 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. Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference
