Estimating share value using the dcf model

Assignment Help Financial Management

Reference no: EM131867842

Estimating Share Value Using the DCF Model Following are forecasts of Whole Foods sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of September 25, 2016.

Reported Horizon Period

$ millions 2016 2017 2018 2019 2020 Terminal Period

Sales $15,724 $15,881 $16,199 $16,523 $16,853 $17,022

NOPAT 526 524 535 545 556 562

NOA 3,466 3,500 3,570 3,642 3,715 3,752

Answer the following requirements assuming a discount rate (WACC) of 6%, a terminal period growth rate of 1%, common shares outstanding of 318.3 million, and net nonoperating obligations (NNO) of $242 million.

(a) Estimate the value of a share of Whole Foods' common stock using the discounted cash flow (DCF) model as of September 25, 2016.

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.

Reported Forecast Horizon

($ millions) 2016 2017 2018 2019 2020 Terminal Period

Increase in NOA Answer Answer Answer Answer Answer

FCFF (NOPAT - Increase in NOA) Answer Answer Answer Answer Answer

Discount factor [1 / (1 + rw)t ] (Round 5 decimal places) Answer Answer Answer Answer

Present value of horizon FCFF Answer Answer Answer Answer

CUMULATIVE present value of horizon FCFF $ Answer

Present value of terminal FCFF Answer

Total firm value Answer NNO Answer

Firm equity value $ Answer

Shares outstanding (millions) Answer (Round one decimal place)

Stock price per share $ Answer (Round two decimal places)

(b) Whole Foods stock closed at $30.96 on November 18, 2016, 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?

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

B. Our stock price estimate is only a few cents lower than the Whole Foods market price, indicating that we believe that Whole Foods stock is accurately priced. Our stock price estimate is lower than the Whole Foods market price, indicating that we believe that Whole Foods stock is overvalued.

C. 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.

D. Our stock price estimate is lower than the Whole Foods market price, indicating that we believe that Whole Foods 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.

Reference no: EM131867842

Questions Cloud

Compute the annualized irr for this loan assuming tim : Compute the annualized IRR for this loan assuming Tim will prepay in 5 years.

How can we use the t-test for testing hypothesis : How can we use the t-test for testing hypothesis whether the reduced turnover rate for company results in better profits?

Required rates of return on individual securities : The security market line is equation that shows relationship between risk as measured by beta and the required rates of return on individual securities.

What is difference in maturity risk premiums on two notes : If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes;

Estimating share value using the dcf model : Estimating Share Value Using the DCF Model Following are forecasts of Whole Foods sales, net operating profit after tax (NOPAT),

Compute the cost of capital for the firm : Compute the cost of capital for the firm for the following:

Economic interpretation of the corporate cost of capital : What is meant by a firm’s debt capacity? What is the economic interpretation of the corporate cost of capital?

What is the real value of the payment : A bank makes a 30 year Fully Amortizing FRM for $1,500,000 at an annual interest rate of 6% compounded monthly, What is the real value of the 120th payment?

What is the fully indexed rate on the loan in one year : In one year after the loan is originated, the Libor is 7.20%. What is the fully indexed rate on the loan in one year?

User Account

All Pages