Financial Statement Analysis & Valuation Third Edition

1. Financial Statement Analysis & Valuation Third Edition Peter D. Mary Lea Gregory A. Xiao-Jun Easton McAnally Sommers Zhang

2. Module 14: Operating-Income-Based Valuation

3. Residual Operating Income (ROPI) Valuation Model • Residual operating income (ROPI) is computed as follows: • ROPI = NOPAT – (rw Net operating assets) • where • NOPAT is net operating profit after tax, • rw is weighted average cost of capital (WACC), • NOA is Net operating assets.

4. Residual Operating Income (ROPI) Valuation Model • The ROPI model estimates firm value equal to the current book value of net operating assets plus the present value of expected ROPI. The computation is similar to that for DCF and involves 5 steps: • Forecast and discount ROPI for the horizon period. • Forecast and discount ROPI for the terminal period. • Sum the present values of the horizon and terminal periods and then add to the current book value of net operating assets (net working capital plus long-term assets) to get firm value. • Subtract net nonoperating obligations (NNO) from firm value to yield firm equity value. • Divide firm equity value by the number of shares outstanding to yield stock value per share.

5. Residual Operating Income (ROPI) Model

6. Managerial Insights from the ROPI Model • Actions to increase firm value: • Decrease the NOA required to generate a given level of NOPAT • Increase NOPAT with the same level of NOA investment

7. Reduction of NOA Reduction of net working capital: Reduction of long-term operating assets:

8. Increasing NOPAT

9. DCF and ROPI Models

10. End Module 14