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.

	Reported	Horizon Period
$ millions	2018	2019	2020	2021	2022	Terminal Period
Sales	$56,912	$57,766	$58,632	$59,512	$60,404	$61,008
NOPAT	2,492	2,542	2,580	2,619	2,658	2,684
NOA	4,032	4,097	4,158	4,221	4,284	4,327

Answer the following requirements assuming a discount rate (WACC) of 7.8%, a terminal period growth rate of 1%, common shares outstanding of 135.6 million, net nonoperating obligations (NNO) of $(6,129) million, which is negative because Humanas nonoperating assets exceed its nonoperating liabilities, and no noncontrolling interest (NCI) on the balance sheet.

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

Instructions:

• Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share.

• Round discount factors to 5 decimal places.
• Round stock price per share to two decimal places.
• Use your rounded answers for subsequent calculations.
• Use a negative sign with your NNO answer.

	Reported	Forcast Horizon
($ millions)	2018	2019	2020	2021	2022	Terminal Period
ROPI (NOPAT - [NOABeg rw])		Answer	Answer	Answer	Answer	Answer
Discount factor [1/(1+rw)t]		Answer	Answer	Answer	Answer
Present value of horizon ROPI		Answer	Answer	Answer	Answer
Cumulative present value of horizon ROPI	Answer
Present value of terminal ROPI	Answer
NOA	Answer
Total firm value	Answer
NNO	Answer
Firm equity value	Answer
Shares outstanding (millions)	Answer
Stock price per share	Answer

(b) Humana (HUM) stock closed at $307.56 on February 21, 2019, the date the 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? 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 slightly higher than the HUM market price, indicating that we believe that HUM stock is slightly undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher 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 slightly higher than the HUM market price, indicating that we believe that HUM stock is slightly undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly higher than the HUM market price, indicating that we believe that HUM stock is slightly overvalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.