Question

A company has an expected RNOA of 13.7%, net operating assets of $297 million and a WACC of 8.1%. What is the current market value of the company's operations if its residual operating income is expected to grow at 3.6% p.a. indefinitely?

Answer 1

Given expected return on net operation asset (RNOA)= 13.7%

and Net operating asset(NOA) = $297 Million

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

13.7%= NOPAT for next year/297*100

13.7%*297= NOPAT for next year

NOPAT for next year= 40.689

Residual income of the company for the next year= NOPAT for next year- WACC * NOA

=40.689-8.1%*297

=40.689-24.057

=16.632

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

= 297+16.632/(8.1%-3.6%)

=297+16.632/4.5%

=297+369.60

=666.6 Million

hence the expected value of the company = 666.6 Million