Forecasting and Estimating Share Value Using the ROPI Model

a) Compute CVS's net operating assets (NOA) as of December 31, 2012.

b) Compute net operating profit after tax (NOPAT) for fiscal year ended December 31, 2012, assuming a federal and state statutory tax rate of 37%.

c) Forecast CVS's sales, NOPAT, and NOA for 2013 through 2016 using the following assumptions:

Sales growth	10%
Net operating profit margin (NOPM)	3.6%
Net operating asset turnover (NOAT) at fiscal year-end	2.67

Forecast the terminal period value assuming a 1% terminal period growth and using the NOPM and NOAT assumptions above.

d) Estimate the value of a share of CVS common stock using the discounted cash flow (DCF) model as of December 31, 2012; assume a discount rate (WACC) of 7%, common shares outstanding of 1,231 million, and net nonoperating obligations (NNO) of $8,448 million.

e) CVS?s stock closed at $55.21 on February 15, 2013, the date the form 10-K was filed with the SEC. How does your valuation estimate compare with the closing price? What do you believe are some reason for the difference?

Module 14 homework Forecasting and Estimating Share Value Using the ROPI Model Following are the income statement and balance sheet for CVS Caremark Corp. CVS CAREMARK INC. Balance Sheets (In millions, except per share amounts) Assets Cash and cash equivalents Shortterm investments Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Other assets Total assets Liabilities Accounts payable Claims and discounts payable Accrued expenses Shortterm debt Current portion of longterm debt Total current liabilities Longterm debt Deferred income taxes Other longterm liabilities Redeemable noncontrolling interest Shareholders' equity: Preferred stock, par value $0.01:0.1 shares authorized; none issued or outstanding Common stock, $0.01 par value, 3,200 shares authorized; 1,667 issued and 1,231 shares outstanding at December 31, 2012 and 1,640 shares issued and 1,298 shares outstanding at December 31, 2011 Treasury stock at cost: 435 shares at December 31, 2012 and 340 shares at December 31, 2011 Shares held in trust: 1 share at December 31, 2012 and 2 shares at December 31, 2011 Capital surplus Retained earnings Dec. 31, 2012 Dec. 31, 2011 $ 1,375 5 6,473 10,759 663 577 $ 1,413 5 6,047 10,046 503 580 19,852 8,632 26,395 9,753 1,280 18,594 8,467 26,458 9,869 1,155 $65,912 $ 5,070 3,974 4,051 690 5 $64,543 $ 4,370 3,487 3,293 750 56 13,790 9,133 3,784 1,501 11,956 9,208 3,853 1,445 30 17 16 (16,270) (11,953) (31) 29,120 25,049 (56) 28,126 22,090 CVS CAREMARK INC. Balance Sheets Dec. 31, 2012 (In millions, except per share amounts) Assets Cash and cash equivalents Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity (In millions) Net revenues Cost of revenues Dec. 31, 2011 $ 1,375 (181) 37,704 $ 1,413 (172) 38,051 $65,912 $64,543 CVS CAREMARK INC. Consolidated Statements of Income Dec. 31, 2012 Dec. 31, 2011 Dec. 31, 2010 $ 123,133 $ 107,100 $ 95,778 100,627 86,539 75,559 Gross profit 22,506 15,278 20,561 14,231 20,219 14,082 7,228 557 348 6,330 584 6,137 536 6,323 2,441 5,746 2,258 5,601 2,179 Income from continuing operations 3,882 Income (loss) from discontinued operations, net of (7) tax Net income 3,875 2 Net loss attributable to noncontrolling interest 3,488 (31) 3,422 2 3,457 4 3,424 3 Net income attributable to CVS Caremark $ 3,461 $ 3,427 Operating expenses Operating profit Interest expense, net Loss on early extinguishment of debt Income before income tax provision Income tax provision $ 3,877 (a) Compute CVS's net operating assets (NOA) as of December 31, 2012. b) Compute net operating profit after tax (NOPAT) for fiscal year ended December 31, 2012, assuming a federal and state statutory tax rate of 37%. c) Forecast CVS's sales, NOPAT, and NOA for 2013 through 2016 using the following assumptions: Sales growth Net operating profit margin (NOPM) Net operating asset turnover (NOAT) at fiscal yearend 10% 3.6% 2.67 Forecast the terminal period value assuming a 1% terminal period growth and using the NOPM and NOAT assumptions above. d) Estimate the value of a share of CVS common stock using the discounted cash flow (DCF) model as of December 31, 2012; assume a discount rate (WACC) of 7%, common shares outstanding of 1,231 million, and net nonoperating obligations (NNO) of $8,448 million. e) CVS's stock closed at $55.21 on February 15, 2013, the date the form 10-K was filed with the SEC. How does your valuation estimate compare with the closing price? What do you believe are some reason for the difference