Question

Estimating Share Value Using the DCF Model
Assume following are forecasts of Abercrombie & Fitch's sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 29, 2011.

	Reported	Horizon Period
(In millions)	2011	2012	2013	2014	2015	Terminal Period
Sales	$ 3,750	$ 4,500	$ 5,400	$ 6,480	$ 7,776	$ 7,853
NOPAT	464	539	654	794	982	960
NOA	1,320	1,602	1,933	2,332	2,791	2,802

Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating obligations (NNO) of $(261) million (negative NNO reflects net nonoperating assets such as investments rather than net obligations).

(a) Estimate the value of a share of Abercrombie & Fitch common stock using the discounted cash flow (DCF) model as of January 29, 2011.

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 any of your answers.

	Reported	Horizon Period
(In millions)	2011	2012	2013	2014	2015	Terminal Period
Increase in NOA		Answer	Answer	Answer	Answer	Answer
FCFF (NOPAT - Increase in NOA)		Answer	Answer	Answer	Answer	Answer
Discount factor [1 / (1 + rw)t ]	(round to 5 decimal places)	Answer	Answer	Answer	Answer
Present value of horizon FCFF		Answer	Answer	Answer	Answer
Cumulative present value of horizon FCFF	Answer
Present value of terminal FCFF	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) Assume Abercrombie & Fitch (ANF) stock closed at $77.56 on March 2, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference?

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

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 ANF market price, indicating that we believe that ANF 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

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

Answer 1

(a)

	PARTICULARS (in millions)	2011	2012	2013	2014	2015	Terminal Period
A	Increase in NOA		282	331	399	459	11
B	FCFF (NOPAT - Increase in NOA)		257	323	395	523	949
C	Discount factor [1 / (1 + rw)t ]		0.88261	0.77900	0.68756	0.60685	0.60685
D	Present value of horizon FCFF (B*C)		227	252	272	317
E	Cumulative present value of horizon FCFF	1068
F	Present value of terminal FCFF	4682 (WN-1)
G	Total firm value (E+F)	5750
H	NNO	261
I	Firm equity value	6011
J	Shares outstanding (millions)	86.2
k	Stock price per share	69.73

Working Note (WN)-1 – Calculation of present value of terminal FCFF-

Terminal Value at the end of 2015 = $ 949 / 0.133- Growth

                                              =949/ 0.133-.01

                                             =$ 7715

Present Value of Terminal value = $ 7715 * 0.60685

                                                           =$ 4682

(b) Our stock price estimate ($69.73) is lower than the ANF market price ($ 77.56), indicating that ANF 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.