Exam 13: Using Financial Statements for Valuation

Assume the following expected free cash flows for Peterson Corporation for 2017: The company has net nonoperating obligations (NNO) of $12,000 and 3,000 shares outstanding. Calculate the per share stock price using the FCFF information above, a discount rate of 7%, and a terminal growth rate of 2%.

Consider how free cash flows to the firm (FCFF) affect a company's equity market valuation. Assuming that a stock is "fairly" valued according to the DCF valuation method based upon consensus expectations, what would the following changes imply all else constant? a. The company's leading competitor files for bankruptcy protection. This will allow the firm to increase its sales growth rate above consensus expectations by gaining substantial market share; the company will leverage its existing asset base to meet increased demand. b. A new competitor has entered the market and the company must respond by upgrading its existing manufacturing processes via a large, multi-year capital expansion project.

Following are financial statement numbers and select ratios for American Eagle Outfitters for 2016, the year ended January 28, 2017. Forecast assumptions and other financial information for AE Outfitters are as follows: Required: a. Use the residual operating income (ROPI) model to estimate the value of AE Outfitters' equity per share at January 28, 2017. b. AE Outfitters' shares closed at $14.28 per share on March 10, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?

Which of the following represents the present value of a terminal period FCFF if r_w is the weighted average cost of capital?

Use the following information (in millions) and the residual operating income (ROPI) model, to value the equity of a small publicly-traded company. The company's stock is currently trading at $53 per share. Would you purchase shares of this stock at $53? Why or why not?

Following is information from American Eagle Outfitters for 2016, the year ended January 28, 2017, ($ in thousands). Projected net operating assets (NOA) for 2017 is:

Barrington Corporation reports the following information. What is the company's residual operating income (ROPI) for 2017?

The price one is willing to pay for a common stock is positively related to expected free cash flows to the firm (FCFF) and negatively related to the required rate of return.

There are many types of equity valuation models. They differ mainly in:

Following are the balance sheet and income statement for Goldsmith Inc. Required: a. Calculate net operating profit after tax (NOPAT) for 2017. Assume that the company's statutory tax rate is 37%. b. Calculate net operating assets (NOA) for 2016 and 2017. c. What is the free cash flows to the firm (FCFF) for 2017 for the Goldsmith? d. What is the residual operating income (ROPI) for 2017 for the Goldsmith? The company's weighted average cost of capital is 8.0%.

Assume that your company reports net operating working capital of $123,800, long-term operating assets of $365,700, long-term operating liabilities of $211,900, and net nonoperating obligations of $1,100. What is the amount of your net operating assets (NOA)?

Firms can increase free cash flow to the firm (FCFF) in the short run by cutting back on investment in fixed assets.

Following is information from Bava Industries for 2017. Projected 2019 total revenue would be:

Following are the income statements and balance sheets for Darden Restaurants, Inc. for the fiscal year ending May 28, 2017. Continued next page Required: a. Calculate the following metrics for 2017: $\bullet$ Net operating profit after tax (NOPAT) - assume the statutory tax rate is 37% $\bullet$ Net operating assets (NOA) $\bullet$ Net operating profit margin (NOPM) $\bullet$ Net operating asset turnover (NOAT) $\bullet$ Net nonoperating obligations (NNO) b. Use the residual operating income (ROPI) model to estimate the per share value of Darden Restaurant's equity, at May 28, 2017. The company's weighted average cost of capital is 6%. Assume a sales growth rate of 5% for 2018-2021 with a terminal growth rate of 2%. c. Darden Restaurant's shares closed at $85.83 per share on July 26, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?

Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2016 (ending January 28, 2017). Forecast assumptions and other financial information for Target are as follows: Required: a. Use the residual operating income (ROPI) model to estimate the value of Target's equity, per share at fiscal year-end. b. Target Corp. shares closed at $53.82 per share on March 8, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?

Consider the following in relation to the (DCF) model: a. What do positive free cash flows to the firm imply? b. What do negative free cash flows to the firm imply? c. Is it possible for a company to be experiencing positive earnings while having negative cash flows? Explain.

In its 2017 fiscal year report, a company reported the following information: The company's WACC is 6%. What is the residual operating income (ROPI) for 2017? Is this an improvement over the previous year? Is this a good sign for investing in this company?

The following is the income statement for Mattel Inc. ($ thousands) Required: a. Assume that the company's statutory tax rate is 37%. Compute the tax shield for 2016 and the tax rate on operating profit. b. What is the company's net operating profit after tax (NOPAT) for 2016? c. Determine the net operating profit margin for the year.

The following is the balance sheet for Staples for 2017. Required: a. Calculate operating assets for 2017. b. Calculate operating liabilities for 2017. c. Determine net operating assets (NOA) for 2017.

Name and describe some of the advantages/disadvantages of both the Discounted Cash Flow (DCF) and the Residual Operating Income (ROPI) valuation models.