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A company has an expected RNOA of 12
A company has an expected RNOA of 12.8%, net operating assets of $302m and a WACC of 9.6%. What is the current market value of the company's operations if its residual operating income is expected to grow 3% indefinitely?
Expert Solution
Computation of the current market value of the company:-
RNOA for next year = Net operating profit after tax (NOPAT for next year) / Net operating assets (NOA)
12.8% = NOPAT for next year / $302
NOPAT for next year = $302 * 12.8%
= $38.656m
Residual income for next year= NOPAT for next year - (WACC * NOA)
= $38.656 - (9.6% * $302)
= $38.656 - $28.992
= $9.664m
Current market value = Book value of operating assets + (Residual income for next year/(Cost of capital- Growth rate))
= $302 + ($9.664/(9.6%-3%))
= $302 + $146.42
= $448.42
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