Question

A company has an expected RNOA of 12.9%, net operating assets of $292 million and a WACC of 8%. What is the current market value of the company's operations if its residual operating income is expected to grow at 3.3% p.a. indefinitely?

Answer 1

Given that the return on net operating assets is 12.9%

Given net operating assets = 292 million

The formula for RNOA = (Net operating profit after tax)/(Operating Assets)

0.129 = Operating profit after tax/292

Operating profit = 292*0.129 = 37.668 Million.

Given WACC = 8%

Given that the operating income is expected to grow at a rate of 3.3% per annum.

Here let us assume that Re as the weighted average cost of capital .

Hence using the residual income approach the value of the firm will be as follows.

Vo = R1/(Re-g)

Where Vo is the value of the firm

R1 is the residual income at year-2 ( Considering the current Operating income as year-1)

Re = Cost of equity here it is WACC

G = Growth Rate

Hence Vo = (37.668 * (1+0.033))/(0.08 - 0.033)

= 38.91104/0.047

Hence value of the firm = 827.8946 Million.