Estimating Share Value Using the ROPI Model

Following are forecasts of sales, net operating profit after tax $($NOPAT$),$ and net operating assets $($NOA$)$ as of December $31,2018,$ for Humana.

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

Reported Horizon period Terminal

$ millions $20182019202020212022$ Period

Sales $$56,752$ $$57,606$ $$58,472$ $$59,352$ $$60,244$ $$60,848$

NOPAT $2,4922,5422,5802,6192,6582,684$

NOA $3,8723,9373,9984,0614,1244,167$

Answer the following requirements with the following assumptions:

Assumptions

Terminal period growth rate $1\%$

Discount rate $($WACC$)7\mathrm{.}8\%$

Common shares outstanding $135\mathrm{.}6$ million

Net nonoperating obligations $($NNO$)$ $$(6,289)$ million

NNO is negative because Humana$$s nonoperating assets exceed its nonoperating liabilities.

$($a$)$ Estimate the value of a share of common stock using the residual operating income $($ROPI$)$ model as of December $31,2018.$

Reported Forecast Horizon Terminal

$($$ millions$)20182019202020212022$ Period

ROPI $($NOPAT $-[$NOABeg x rw$])$ Answer $1$

Answer $2$

Answer $3$

Answer $4$

Answer $5$

Present value of horizon ROPI Answer $6$

Answer $7$

Answer $8$

Answer $9$

Cum present value of horizon ROPI Answer $10$

Present value of terminal ROPI Answer $11$

NOA Answer $12$

Total firm value Answer $13$

Less NNO Answer $14$

Firm equity value Answer $15$

Shares outstanding $($millions$)$ Answer $16$

Stock price per share Answer $17$

$($b$)$ Humana $($HUM$)$ stock closed at $$307\mathrm{.}56$ on February $21,2019,$ the date the $10-$K was filed with the SEC. How does your valuation estimate compare with this closing price?

Answer $18$