Estimating Share Value Using the DCF Model

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

a. Assume the following forecasts for TXRH’s sales, NOPAT, andNOA for 2016 through 2019. Forecast the terminal period valuesassuming a 1% terminal period growth rate for all three modelinputs: 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 thediscounted cash flow (DCF) model as of December 29, 2015; assume adiscount rate (WACC) of 7%, common shares outstanding of 70,091thousand, net nonoperating obligations (NNO) of $(14,680) thousand,and noncontrolling interest (NCI) from the balance sheet of $7,520thousand. Note that NNO is negative because the company’s cashexceeds its nonoperating liabilities.

Rounding instructions:

Use rounded answers for subsequent computations.

Round answers to the nearest whole number unless otherwisenoted.

Round discount factor to 5 decimal places and stock price pershare 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 Form10-K was filed with the SEC. How does your valuation estimatecompare with this closing price?

Stock prices are a function of many factors. It is impossible tospeculate 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 asthe WACC discount rate. Our higher stock price estimate might bedue to more optimistic forecasts or a lower discount rate comparedto 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 asthe WACC discount rate. Our higher stock price estimate might bedue to more pessimistic forecasts or a higher discount ratecompared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly higher than the WMT marketprice, indicating that we believe that WMT stock is slightlyovervalued. Stock prices are a function of expected NOPAT and NOA,as well as the WACC discount rate. Our higher stock price estimatemight be due to more pessimistic forecasts or a higher discountrate compared to other investors' and analysts' modelassumptions.

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

The valuation estimate at 7.5% would be lower than the estimatecalculated in part a because the discount rate increased. Incontrast, the valuation estimate at 6.5% would be higher than ourestimate.

The valuation estimate at 7.5% would be higher than the estimatecalculated in part a because the discount rate increased. Incontrast, the valuation estimate at 6.5% would be lower than ourestimate.

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