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Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for...

Estimating Share Value Using the DCF Model

Following are the income statement and balance sheet for Texas Roadhouse for the year ended December 29, 2015.

a. Assume the following forecasts for TXRH’s sales, NOPAT, and NOA for 2016 through 2019. Forecast the terminal period values assuming a 1% terminal period growth rate for all three model inputs: Sales, NOPAT, and NOA.

Round your answers to the nearest dollar.

Reported Forecast Horizon Terminal
$ thousands 2015 2016 2017 2018 2019 Period
Sales $1,807,368 $2,069,436 $2,369,504 $2,547,217 $2,738,258 $Answer
NOPAT 102,495 169,694 194,299 208,872 224,537 $Answer
NOA 662,502 758,591 868,587 933,731 1,003,760 $Answer

b. Estimate the value of a share of TXRH common stock using the discounted cash flow (DCF) model as of December 29, 2015; assume a discount rate (WACC) of 7%, common shares outstanding of 70,091 thousand, net nonoperating obligations (NNO) of $(14,680) thousand, and noncontrolling interest (NCI) from the balance sheet of $7,520 thousand. Note that NNO is negative because the company’s cash exceeds its nonoperating liabilities.

Rounding instructions:

Use rounded answers for subsequent computations.

Round answers to the nearest whole number unless otherwise noted.

Round discount factor to 5 decimal places and stock price per share to two decimal places.

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

TXRH Reported Forecast Horizon Terminal
$ thousands 2015 2016 2017 2018 2019 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 ] Answer Answer Answer Answer
Present value of horizon FCFF Answer Answer Answer Answer
Cumulative PV of horizon FCFF $Answer
Present value of terminal FCFF Answer
Total firm value Answer
NNO Answer
NCI Answer
Firm equity value $Answer
Shares outstanding (thousands) Answer
Stock price per share $Answer

c. TXRH closed at $42.13 on February 26, 2016, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price?

Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.

Our stock price estimate is higher than the TXRH market price, indicating that we believe that the stock is slightly 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.

Our stock price estimate is higher than the TXRH market price, indicating that we believe that the stock is slightly 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly overvalued. 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 pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

d. If WACC had been 7.5%, what would the valuation estimate have been? What about if WACC has been 6.5%?

The valuation estimate at 7.5% would be lower than the estimate calculated in part a because the discount rate increased. In contrast, the valuation estimate at 6.5% would be higher than our estimate.

The valuation estimate at 7.5% would be higher than the estimate calculated in part a because the discount rate increased. In contrast, the valuation estimate at 6.5% would be lower than our estimate.

The valuation estimate would be the same regardless of the rate used to compute the estimate.

Solutions

Expert Solution

a.. Reported Forecast Horizon
$ ' 000s 2015 2016 2017 2018 2019 Terminal Period
Sales 1807368 2069436 2369504 2547217 2738258 2738258*1.01/(0.07-0.01)= 46094010
NOPAT 102495 169694 194299 208872 224537 224537*1.01/(0.07-0.01)= 3779706
NOA 662502 758591 868587 933731 1003760 1003760*1.01/(0.07-0.01)= 16896627
TXRH---- WACC--7% Reported Forecast Horizon
$ thousands 2015 2016 2017 2018 2019
Increase in NOA 96089 109996 65144 70029
FCFF (NOPAT - Increase in NOA) 73605 84303 143728 154508
Discount factor [1 / (1 +0.07)^t ] 0.93458 0.87344 0.81630 0.76290
Present value of horizon FCFF 68790 73634 117325 117873
Cumulative PV of horizon FCFF 377621
Present value of terminal FCFF--2019 FCFF*(1+g)/(WACC-g)=(154508*1.01/(0.07-0.01))*0.76290 1984215
Total firm value 2361836
NNO 14680
NCI -7520
Firm equity value 2368996
Shares outstanding (thousands) 70091
Stock price per share 33.80
c. TXRH closed at $42.13 on February 26, 2016, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price?
Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.
d.. TXRH---- 7.5% Reported Forecast Horizon
$ thousands 2015 2016 2017 2018 2019
Increase in NOA 96089 109996 65144 70029
FCFF (NOPAT - Increase in NOA) 73605 84303 143728 154508
Discount factor [1 / (1 +0.075)^t ] 0.93023 0.86533 0.80496 0.74880
Present value of horizon FCFF 68470 72950 115695 115696
Cumulative PV of horizon FCFF 372811
Present value of terminal FCFF--2019 FCFF*(1+g)/(WACC-g)=(154508*1.01/(0.075-0.01))*0.74880 1797731
Total firm value 2170542
NNO 14680
NCI -7520
Firm equity value 2177702
Shares outstanding (thousands) 70091
Stock price per share 31.07
d.. TXRH---- 6.5% Reported Forecast Horizon
$ thousands 2015 2016 2017 2018 2019
Increase in NOA 96089 109996 65144 70029
FCFF (NOPAT - Increase in NOA) 73605 84303 143728 154508
Discount factor [1 / (1 +0.065)^t ] 0.93897 0.88166 0.82785 0.77732
Present value of horizon FCFF 69113 74327 118985 120103
Cumulative PV of horizon FCFF 382527
Present value of terminal FCFF--2019 FCFF*(1+g)/(WACC-g)=(154508*1.01/(0.065-0.01))*0.77732 2205512
Total firm value 2588039
NNO 14680
NCI -7520
Firm equity value 2595199
Shares outstanding (thousands) 70091
Stock price per share 37.03
Valuation of Stock price
At 7% WACC 33.80
At 7.5% WACC 31.07
At 6.5% WACC 37.03
Thus,
The valuation estimate at 7.5% would be lower than the estimate calculated in part a because the discount rate increased. In contrast, the valuation estimate at 6.5% would be higher than our estimate.

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