In: Accounting
17. Following are financial statement numbers and select ratios for American Eagle Outfitters for 2016, the year ended January 28, 2017.
Current |
Forecast Horizon |
Terminal Year |
||||
($ thousands) |
2016 |
2017 |
2018 |
2019 |
2020 |
|
Sales |
3,609,865 |
3,754,260 |
3,866,887 |
3,982,894 |
4,102,381 |
4,143,405 |
Net operating profit after tax (NOPAT) |
207,262 |
213,993 |
220,413 |
227,025 |
233,836 |
236,174 |
Net operating assets (NOA) |
825,956 |
859,098 |
884,871 |
911,417 |
938,760 |
948,148 |
Forecast assumptions and other financial information for AE Outfitters are as follows:
Sales growth 2017 |
4% |
Sales growth 2018 to 2020 |
3% |
Terminal growth rate |
1% |
Net operating profit margin (NOPM) |
5.7% |
Net operating asset turnover (NOAT) |
4.37 |
Discount rate |
5% |
Shares outstanding in thousands |
181,886 |
Stockholders' equity |
$1,204,569 |
Net nonoperating obligations (NNO) |
$(378,613) |
Required:
a. Use the residual operating income (ROPI) model to estimate the value of AE Outfitters’ equity per share at January 28, 2017.
b. AE Outfitters’ shares closed at $14.28 per share on March 10, 2017, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price?
a. Use the residual operating income (ROPI) model to estimate the value of AE Outfitters’ equity per share at January 28, 2017.
Answer:
Current | Forecast Horizon | Terminal Year | ||||
($millions) | 2016 | 2017 | 2018 | 2019 | 2020 | |
Sales | 3,609,865 | 3,754,260 | 3,866,887 | 3,982,894 | 4,102,381 | 4,143,405 |
NOPAT | 207,262 | 213,993 | 220,413 | 227,025 | 233,836 | 236,174 |
NOA | 825,956 | 859,098 | 884,871 | 911,417 | 938,760 | 948,148 |
ROPI (NOPAT- [NOABeg × rw]) | 172,695 | 177,458 | 182,781 | 188,265 | 189,236 | |
Discount factor [1 / (1 + rw)t ] | $0.95238 | $0.90703 | $0.86384 | $0.82270 | ||
PV of horizon ROPI | 164,472 | 160,960 | 157,893 | 154,886 | ||
Cumulative PV of horizon ROPI | 638,211 | |||||
PV of terminal ROPI | 3,892,123 | |||||
NOA | 825,956 | |||||
Total firm value | 5,356,290 | |||||
Less NNO | -378613 | |||||
Firm equity value | $5,734,903 | |||||
Shares outstanding (millions) | 181,886 | |||||
Stock value per share | $31.53 |
b. AE Outfitters’ shares closed at $14.28 per share on
March 10, 2017, the date the 10-K was filed with the SEC. How does
your valuation compare with this closing price?
Answer:
The estimated market price per share is $31.53 at January 28, 2017. AE Outfitters shares closed at $14.28 per share which means that the firm is undervalued when comparing to the estimated per share price of $31.53 which we calculated using ROPI Model . The reason for this undervalue might be either due the lower discount rate or due to aggressive growth projections.
Calculation:
The ROPI model is prepared to determine the firm equity value which is same as the sum of net operating asset book value and the PV of anticipated residual operating income. Here we need to estimate the value of AE Outfitters’ equity per share.
ROPI = Net operating profit after tax - (Net Operating AssetsBeg * rw)
The Net operating profit after tax (NOPAT) , Net Operating Assets (NOA) and the rw is given in the question. There might be difference due to the rounding.
rw / Discount rate = 5%
2017:
ROPI = 213,993 - (825,956 × 5%) = 172,695
2018:
ROPI = 220,413 - (859,098 × 5%) = 177,458
2019:
ROPI = 227,025 - (884,871 × 5%) = 182,781
2020:
ROPI = 233,836 - (911,417 × 5%) = 188,265
Terminal Year:
ROPI = 236,174 - (938,760 × 5%) = 189,236
Then we need to calculate the Discount factor. Which can calculate using formula [1 / (1 + rw)t ]
2017:
Discount factor = [1 / (1 + 5%)1 ] = 0.95238
2018:
Discount factor = [1 / (1 + 5%)2 ] = 0.90703
2019:
Discount factor =[1 / (1 + 5%)3 ] = 0.86384
2020:
Discount factor = [1 / (1 + 5%)4 ] = 0.82270
Now, we can calculate the PV of horizon ROPI, by multiplying the ROPI with Discount factor.
2017:
PV of horizon ROPI = 172,695 * 0.95238 = 164,472
2018:
PV of horizon ROPI = 177,458 * 0.90703 = 160,960
2019:
PV of horizon ROPI =182,781 * 0.86384 = 157,893
2020:
PV of horizon ROPI = 188,265 * 0.82270 = 154,886
Cumulative present value of horizon ROPI is the total of the PV of horizon ROPI = 164,472 + 160,960 + 157,893 + 154,886 = 638,211
Then we need to calculate the PV of terminal ROPI. That is:
PV of terminal ROPI = Terminal Year ROPI/(Discount rate - Terminal growth rate)/(1+growth rate)^No. of years = $189,236 / [0.05 - 0.01] / (1.05)4 = $3,892,123.14 million
The total firm value is the sum of the Cumulative present value of horizon ROPI, PV of terminal ROPI and NOA of 2016 ,
Total Firm value = 638,211 + 3,892,123.14 + 825,956 = 5,356,290
Now, we can calculate the Firm equity value. It is the Total firm value minus the Net nonoperating obligations.
Net nonoperating obligations is given in the question, which is negative. That is - 378,613.
Firm equity value = 5,356,290 - -378,613 = 5,734,903
We are asked to find the the value of AE Outfitters’ equity per share. To get that we need to divide the firm equity value with Shares outstanding.
Shares outstanding = 181,886 in thousands
Stock value per share = 5,734,903 / 181,886 = 31.53