Estimating Share Value Using the DCF Model

Following are forecasted sales, NOPAT, and NOA for AT&T for 2019 through 2022

a. Forecast the terminal period values assuming a 2% terminal period growth rate.

Round answers to the nearest dollar.

	Reported	Forecast Horizon
$ millions	2018	2019	2020	2021	2022	Terminal Period
Sales	$170,756	$181,001	$191,861	$203,373	$215,576	Answer
NOPAT	20,895	22,082	23,407	24,812	26,300	Answer
NOA	369,039	390,931	414,387	439,251	465,607	Answer

b. Estimate the value of a share of AT&T common stock using the discounted cash flow (DCF) model as of December 31, 2018; assume a discount rate (WACC) of 5.7%, common shares outstanding of 7,281.6 million, net nonoperating obligations (NNO) of $175,155 million, and noncontrolling interest (NCI) from the balance sheet of $9,795 million.

Rounding instructions:

• Use rounded answers for subsequent computations.

• Round answers to the nearest whole number unless otherwise noted (do not round shares outstanding).
• Round discount factor to 5 decimal places and stock price per share to two decimal places.
• Use negative signs for your FCFF and Present value of horizon FCFF answers, when appropriate. Otherwise, do not use negative signs with your answers.

TXRH	Reported			Forecast Horizon		Terminal
$ thousands	2018	2019	2020	2021	2022	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 ]		Answer	Answer	Answer	Answer
Present value of horizon FCFF		Answer	Answer	Answer	Answer
C.u.m PV of horizon FCFF	Answer
Present value of terminal FCFF	Answer
Total firm value	Answer
NNO	Answer
NCI	Answer
Firm equity value	Answer
Shares outstanding	Answer
Stock price per share	Answer

c. AT&T closed at $30.85 on February 20, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price?

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 AT&T market price, indicating that we believe that the stock is slightly 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 less optimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is lower than the AT&T market price, indicating that we believe that the stock is slightly 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 less optimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly lower than the AT&T market price, indicating that we believe that AT&T stock is slightly 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 less optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.