Estimating Share Value Using the DCF Model Following are forecasts of sales, net

Question

Estimating Share Value Using the DCF 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.

Answer the following requirements assuming a discount rate (WACC) of 11%, a terminal period growth rate of 1%, common shares outstanding of 392.6 million, net nonoperating obligations (NNO) of $1,274 million and noncontrolling interest (NCI) on the balance sheet of $690 million.

(a) Estimate the value of a share of Best Buy's common stock using the discounted cash flow (DCF) 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 Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period Sales $50,272 $52,786 $55,425 $58,196 $61,106 $61,717 NOPAT 1,389 1,584 1,663 1,746 1,833 1,852 NOA 7,876 8,248 8,660 9,093 9,548 9,643

Explanation / Answer

2011 2012 2013 2014 2015 terminal Increase in NOA 372 412 433 455 95 FCFF (NOPAT - Increase in NOA) 1212 1251 1313 1378 1757 Discount factor [1/(1+rw)t] 0.90090 0.81162 0.73119 0.65873 Present value of horizon FCFF 1092 1015 960 908 Cumulative present value of horizon FCFF 3975 Present value of terminal FCFF 1157 Total firm value 5132 less NNO 1274 LESS NCI 690 Firm equity value $3168 Shares outstanding (millions) 392.6 Stock price per share (firm equity value / shares outstanding ) $8.07

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