Estimating Share Value Using the ROPI Model Following are forecasts of Illinois Tool Works Inc. sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 31, 2018. Reported Horizon Period $ millions 2018 2019 2020 2021 2022 Terminal Period Sales $14,768 $15,654 $16,593 $17,589 $18,644 $19,017 NOPAT 2,711 2,880 3,053 3,236 3,430 3,499 NOA 9,462 10,028 10,630 11,268 11,944 12,183 Answer the following requirements assuming a discount rate (WACC) of 7.35%, a terminal period growth rate of 2%, common shares outstanding of 328.1 million, and net nonoperating obligations (NNO) of $6,204 million. (a) Estimate the value of a share of ITW’s common stock using the residual operating income model (ROPI) model as of December 31, 2018. Instructions: Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share. Round discount factors to 5 decimal places. Round stock price per share to two decimal places. Do not use negative signs with any of your answers. Reported Horizon Period ($ millions) 2018 2019 2020 2021 2022 Terminal Period ROPI (NOPAT - [NOABeg × rw]) Answer Answer Answer Answer Answer Discount factor [1 / (1 + rw)t ] Answer Answer Answer Answer Present value of horizon ROPI Answer Answer Answer Answer Cum present value of horizon ROPI Answer Present value of terminal ROPI Answer NOA Answer Total firm value Answer NNO Answer Firm equity value Answer Shares outstanding (millions) Answer Stock price per share Answer (b) Illinois Tool Works Inc. closed at $144.21 on February 15, 2019, the date the 10-K was filed with the SEC. 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 only slightly higher than the ITW's market price, indicating that we believe that ITW stock is accurately priced. Our stock price estimate is much higher than the ITW's market price, indicating that we believe that ITW stock is 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 optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions. Our stock price estimate is lower than the ITW's market price, indicating that we believe that ITW 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.

Estimating Share Value Using the ROPI Model Following are forecasts of Illinois Tool Works Inc. sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 31, 2018. Reported Horizon Period $ millions 2018 2019 2020 2021 2022 Terminal Period Sales $14,768 $15,654 $16,593 $17,589 $18,644 $19,017 NOPAT 2,711 2,880 3,053 3,236 3,430 3,499 NOA 9,462 10,028 10,630 11,268 11,944 12,183 Answer the following requirements assuming a discount rate (WACC) of 7.35%, a terminal period growth rate of 2%, common shares outstanding of 328.1 million, and net nonoperating obligations (NNO) of $6,204 million. (a) Estimate the value of a share of ITW’s common stock using the residual operating income model (ROPI) model as of December 31, 2018. Instructions: Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share. Round discount factors to 5 decimal places. Round stock price per share to two decimal places. Do not use negative signs with any of your answers. Reported Horizon Period ($ millions) 2018 2019 2020 2021 2022 Terminal Period ROPI (NOPAT - [NOABeg × rw]) Answer Answer Answer Answer Answer Discount factor [1 / (1 + rw)t ] Answer Answer Answer Answer Present value of horizon ROPI Answer Answer Answer Answer Cum present value of horizon ROPI Answer Present value of terminal ROPI Answer NOA Answer Total firm value Answer NNO Answer Firm equity value Answer Shares outstanding (millions) Answer Stock price per share Answer (b) Illinois Tool Works Inc. closed at $144.21 on February 15, 2019, the date the 10-K was filed with the SEC. 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 only slightly higher than the ITW's market price, indicating that we believe that ITW stock is accurately priced. Our stock price estimate is much higher than the ITW's market price, indicating that we believe that ITW stock is 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 optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions. Our stock price estimate is lower than the ITW's market price, indicating that we believe that ITW 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.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter12: Valuation: Cash-flow Based Approaches

Section: Chapter Questions

Problem 1LIC

See similar textbooks

Related questions

Concept explainers

Topic Video

Question

Estimating Share Value Using the ROPI Model
Following are forecasts of Illinois Tool Works Inc. sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 31, 2018.

	Reported	Horizon Period
$ millions	2018	2019	2020	2021	2022	Terminal Period
Sales	$14,768	$15,654	$16,593	$17,589	$18,644	$19,017
NOPAT	2,711	2,880	3,053	3,236	3,430	3,499
NOA	9,462	10,028	10,630	11,268	11,944	12,183

Answer the following requirements assuming a discount rate (WACC) of 7.35%, a terminal period growth rate of 2%, common shares outstanding of 328.1 million, and net nonoperating obligations (NNO) of $6,204 million.

(a) Estimate the value of a share of ITW’s common stock using the residual operating income model (ROPI) model as of December 31, 2018.

Instructions:

Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not round), and stock price per share.
Round discount factors to 5 decimal places.
Round stock price per share to two decimal places.
Do not use negative signs with any of your answers.

	Reported	Horizon Period
($ millions)	2018	2019	2020	2021	2022	Terminal Period
ROPI (NOPAT - [NOABeg × rw])		Answer	Answer	Answer	Answer	Answer
Discount factor [1 / (1 + rw)t ]		Answer	Answer	Answer	Answer
Present value of horizon ROPI		Answer	Answer	Answer	Answer
Cum present value of horizon ROPI	Answer
Present value of terminal ROPI	Answer
NOA	Answer
Total firm value	Answer
NNO	Answer
Firm equity value	Answer
Shares outstanding (millions)	Answer
Stock price per share	Answer

(b) Illinois Tool Works Inc. closed at $144.21 on February 15, 2019, the date the 10-K was filed with the SEC. 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 only slightly higher than the ITW's market price, indicating that we believe that ITW stock is accurately priced.

Our stock price estimate is much higher than the ITW's market price, indicating that we believe that ITW stock is 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 optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is lower than the ITW's market price, indicating that we believe that ITW 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.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.