Estimating Share Value Using the ROPI Model Following are forecasts of Whole Foods sales, net operating profit

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Question:

Estimating Share Value Using the ROPI Model
Following are forecasts of Whole Foods sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of September 25, 2016.

	Reported	Horizon Period
$ millions	2016	2017	2018	2019	2020	Terminal Period
Sales	$15,724	$15,881	$16,199	$16,523	$16,853	$17,022
NOPAT	526	524	535	545	556	562
NOA	3,466	3,500	3,570	3,642	3,715	3,752

Answer the following requirements assuming a discount rate (WACC) of 6%, a terminal period growth rate of 1%, common shares outstanding of 318.3 million, and net nonoperating obligations (NNO) of $242 million.

(a) Estimate the value of a share of Whole Foods' common stock using the residual operating income (ROPI) model as of September 25, 2016.

Rounding instructions:

Round answers to the nearest whole number unless noted otherwise.

Use your rounded answers for subsequent calculations.

Do not use negative signs with your answers.

	Reported	Horizon Period
($ millions)	2016	2017	2018	2019	2020	Terminal Period
ROPI (NOPAT - [NOABeg × rw])		Answer	Answer	Answer	Answer	Answer
Discount factor [1 / (1 + rw)t ]	(round 5 decimal places)	Answer	Answer	Answer	Answer
Present value of horizon ROPI		Answer	Answer	Answer	Answer
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	(round one decimal place)
Stock price per share	$Answer	(round two decimal places)

(b)Whole Foods stock closed at $30.96 on November 18, 2016, 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 only a few cents lower than the Whole Foods market price, indicating that we accurately priced Whole Foods stock.

Our stock price estimate is lower than the Whole Foods market price, indicating that we believe that Whole Foods 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 Whole Foods market price, indicating that we believe that Whole Foods 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.