Estimating Share Value Using the DCF Model Following are forecasts of sales, net
ID: 2743617 • Letter: E
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 410.5 million, and net nonoperating obligations (NNO) of $787 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. (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, the shares outstanding to one decimal place, and and the stock price to two decimal places.) Use your rounded answers for subsequent calculations.
(b) Assume Best Buy (BBY) stock closed at $43.47 on April 1, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference?
Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.
Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY 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 lower than the BBY market price, indicating that we believe that BBY 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.
Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.
Assume Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period Sales $40,023 $44,577 $49,650 $55,300 $61,592 $62,208 NOPAT 1,448 1,628 1,777 2,009 2,226 2,265 NOA 5,287 5,891 6,545 7,282 8,101 8,214Explanation / Answer
I assume you are asking for a) part only as second part is very well explained.
Assume Reported Horizon Period (In millions) 2,011 2,012 2,013 2,014 2,015 Terminal Period Sales 40,023 44,577 49,650 55,300 61,592 $62,208 NOPAT 1,448 1,628 1,777 2,009 2,226 2,265 NOA 5,287 5,891 6,545 7,282 8,101 8,214 Assume Reported Horizon Period (In millions) 2011 2012 2013 2014 2015 Terminal Period Increase in NOA $ - $ 604.00 $ 654.00 $ 737.00 $ 819.00 $ 113.00 FCFF (NOPAT - Increase in NOA) $ 1,448.00 $ 1,024.00 $ 1,123.00 $1,272.00 $ 1,407.00 $ 2,152.00 Discount factor [1 / (1 + rw)t ] 1 0.900900901 0.811622433 0.7311914 0.658730974 0.593451328 Present value of horizon FCFF $ 1,448.00 $ 922.52 $ 911.45 $ 930.08 $ 926.83 $ 1,277.11 Cum present value of horizon FCFF $ 1,448.00 $ 2,370.52 $ 3,281.97 $4,212.05 $ 5,138.88 $ 6,415.99 Present value of terminal FCFF $ 6,415.99 Total firm value $ 1,197.50 NNO (negative NNO) $ 410.50 Firm equity value $ 787.00 Shares outstanding (millions) 9.44 Stock price per share $ 43.47Related Questions
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