Question

A company has an expected RNOA of 12.9%, net operating assets of $301 million and a WACC of 8.3%. What is the current market value of the company's operations if its residual operating income is expected to grow at 2.8% p.a. indefinitely?

Answer 1

Given expected return on net operation asset (RNOA)= 12.9%

Given Net operating asset = $301 Million

RNOA foe next year= Net operating profit after tax (NOPAT for next year)/Net operating asset*100

12.9%= NOPAT for next year/301*100

12.9%*301= Nopat for next year

Nopat for next year= 38.829

Residual income of the company for the next year= Nopat for next year- Wacc* Net operating assets

=38.829-8.3%*301

=38.829-24.983

=13.846

Current market value of the company= Book value of operating assets+ Residual income for next year/(Cost of capital- Growth rate)

= 301+13.846/(8.3%-2.8%)

=301+13.846/5.5%

=301+251.75

=552.75 Million

hence the expected value of the company = 552.75 Million