Question

Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2016 (ending January 28, 2017).
              

	Current	Forecast Horizon				Terminal Year
($ millions)	2016	2017	2018	2019	2020
Total revenues	$69,495	$71,580	$73,727	$75,939	$78,217	$78,999
Net operating profit after tax (NOPAT)	3,302	3,436	3,539	3,645	3,754	3,792
Net operating assets (NOA)	21,128	21,757	22,409	23,082	23,774	24,012

Forecast assumptions and other financial information for Target are as follows:

Revenue growth	3%
Net operating profit margin (NOPM)	4.8%
Net operating asset turnover (NOAT)	3.29
Terminal growth rate	1%
Discount rate	7%
Shares outstanding in millions	556.2
Stockholders' equity	$10,953
Net nonoperating obligations (NNO)	$10,175

Use the residual operating income (ROPI) model to estimate the value of Target’s equity, per share at fiscal year-end.
Target Corp. shares closed at $53.82 per share on March 8, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?

Answer 1

ROPI Valuation :

Given : Discount Rate =Rw=7%

Terminal Growth rate =gt=1%

Net Non operating Obligations =$10175

Calculation Horizon and Terminal ROPI( Amt $Million)	Current	Horizon	Terminal
Details	2016	2017	2018	2019	2020
NOPAT	3,302	3,436	3,539	3,645	3,754	3,792
NOA	21,128	21,757	22,409	23,082	23,774	24,012
ROPI=(NOPAT-beginning NOA*Rw)		1,957	2,016	2,076	2,138	2,128

	Terminal value of ROPI at Year 2020 end=2128/(7%-1%)=35,464					35,464
	Total Horizon ROPI+Terminal ROPI=		1,957	2,016	2,076	37,602
	PV factor @7%=1/1.07^n=		0.9346	0.8734	0.8163	0.7629
	PV of Horizon ROPI+Terminal ROPI=		1,829.05	1,760.78	1,694.94	28,686.51
	Sum of PV of Horizon ROPI+Terminal ROPI=	$          33,971.28
	Add Current NOA	$          21,128.00
	Total Firm value =	$          55,099.28
	Less : NNO	$         (10,175.00)
a	Firm Equity Value in $ Millions	$          44,924.28
b	Outstanding common Equity in millions	556.20
c	Value of Target's Equity per share =a/b=	$                  80.77

The SEC filing shows the share value at $53.82.

So the share is undervalued at present as the

intrinsic value as per ROPI valuation is ($80.77) much

higher than quoted price.