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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 February 26, 2011, for Best Buy, Inc.

	Reported	Horizon Period
(In millions)	2011	2012	2013	2014	2015	Terminal Period
Sales	$50,272	$52,786	$55,425	$58,196	$61,106	$61,717
NOPAT	1,389	1,584	1,663	1,746	1,833	1,852
NOA	7,876	8,248	8,660	9,093	9,548	9,643

Answer the following requirements assuming a discount rate (WACC) of 11%, a terminal period growth rate of 1%, common shares outstanding of 392.6 million, net nonoperating obligations (NNO) of $1,274 million and noncontrolling interest (NCI) on the balance sheet of $690 million. (a) Estimate the value of a share of Best Buy's common stock using the residual operating income (ROPI) model as of February 26, 2011.

Rounding Instructions:

• Round your answer to the nearest whole number except for the discount factors, shares outstanding, and the stock price per share.

• Round the discount factors to five decimal places, common shares outstanding to one decimal place, and the stock price to two decimal places.

• Use your rounded answers for subsequent calculations.

Do not use negative signs with any of your answers below.

	Reported	Horizon Period
BBY (In millions)	2011	2012	2013	2014	2015	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
Cumulative present value of horizon ROPI	Answer
Present value of terminal ROPI	Answer
NOA	Answer
Total firm value	Answer
NNO	Answer
NCI	Answer
Firm equity value	Answer
Shares outstanding (millions)	Answer	(round one decimal place)
Stock price per share	Answer	(round two decimal places)

(b) Best Buy (BBY) stock closed at $30.20 on April 25, 2011. 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 lower than the BBY market price, indicating that we believe that BBY 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.

Our stock price estimate is lower than the BBY market price, indicating that we believe that BBY 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 higher than the BBY market price, indicating that we believe that BBY stock is 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.