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Dr. Lisa Liu [email protected] C1.112

IB9Y9B Financial Reporting and Financial Statement Analysis – Valuation Models

5.1 Valuation Models – Overview & Abnormal Earnings Valuation Model (AEVM)

Session Outlines • Introduce four fundamental valuation models • Review usefulness and limitations of DCF as a focus for company valuation and as a financial performance indicator • Highlight usefulness of net profit and operating profit as indicators of financial performance by focusing on their usefulness for company valuation.

Session Readings • Compulsory textbook readings Penman – Ch 5 pages, 161-165; Ch13 and 14

• Recommended reading Feltham, G. A. and Ohlson, J. A. (1995) ‘Valuation and clean surplus accounting for operating and financial activities’. Contemporary Accounting Research, Vol. 11(2), 689-731

Valuation Basis Economic theory teaches us that the value of an asset is:

Projected Future Payoffst (1 + Discount Rate)t t =1 n

V0 = ∑

Expected future payoffs can be measured in terms of: • Cash Flows – dividends and FCF • Earnings – abnormal earnings (AE or RI) and abnormal operating profit (AOP or ReOI)

Key Ingredients of Each Valuation Model Equity valuation (cost of equity)

Firm valuation (equity plus debt – cost of capital)

Cash flow based valuation approaches

(1) Dividends

(2) Free cash flow

Profit based valuation approaches

(3) Abnormal earnings – return on equity (ROE) and cost of equity

(4) Abnormal operating profit – return on net operating assets (RNOA) and cost of capital

Cash Flow Based Valuation ∞ CFt +1 CFt + 2 CFt + i + + = ...... ∑ 2 i (1 + ρ ) (1 + ρ ) i =1 (1 + ρ ) CFt + 3,terminal CFt +1 CFt + 2 Vt = + + 2 (1 + ρ ) (1 + ρ ) ( ρ − g) * (1 + ρ ) 2

Vt =

Going Concern Terminal value

• Dividends – Equity based − ρ = Cost of equity

• DCF – Enterprise (firm) based − Unlevered FCF; ρ = Cost of capital

−฀฀฀฀฀ ฀ - intrinsic value of equity

(WACC) −฀฀฀฀฀ ฀ - intrinsic value of firm

฀฀฀฀฀฀ = ฀฀฀฀฀ ฀ − ฀฀฀฀฀฀฀฀฀฀

Valuation Models – Fundamental Analysis Free cash flows

Dividends

Earnings Net income (AE)

Cash flow

NOPAT (AOP)

Dividends-based valuation model

DCF valuation model

Earnings-based valuation model

Wealth distribution

Liquidation/Wealth distribution

Wealth creation

Equity value (฀฀฀฀฀ ฀ )

+

Value of Net = Debt (฀฀฀฀฀฀฀฀฀฀ )

Firm value (฀฀฀฀฀ ฀ )

Free Cash Flow Valuation Model

30 (0.134 - 0.05)1.134 2

Assume following 3 year cash flow forecasts, a growth rate of 5% after 2020 and a WACC of 13.4%:

2018

2019

2020+

CFO after tax (C)

100

100

110

Capital expenditure (I)

150

120

80

FCF PV of FCF Intrinsic value of operation or business is £218m. If the firm has £54.5 m net debt (for example), value of equity is £163.5 m (i.e. £218-54.5).

Previously: Theoretical Relationship Between Profit, Book Value, and Cash Flow 1. Assets (A) – Liabilities (L) = Equity (CSE; net assets) 2. CSEt = CSEt-1 + (Revenues – Expenses) – Dividends (d) 3. ΔCSE = Profit – d = (NOPAT – NIE) – d 4. ΔCSE = ΔNOA – ΔNFO 5. FCF → C – I = d + F where F = NIE – ΔNFO So, combine 3, 4, and 5 d = Profit – ΔCSE = (NOPAT – NIE) – Δ(NOA – NFO) So if we re-arrange our accounting equation: d + (NIE – ΔNFO) = NOPAT – ΔNOA = FCF (C – I)

Earnings-based Valuation Models Abnormal Earnings Valuation Model (AEVM)

Introduction:

Cash flow based valuation

Equity valuation (cost of equity)

Firm valuation (equity plus debt – cost of capital)

(1) Dividends

(2) Free cash flow

approaches Accountingbased valuation approaches

(3) s Abnormal earnings – r return on equity (ROE) and cost of equity

(4) Abnormal operating profit – return on net operating assets (RNOA) and cost of capital

Key Thrust of The AccountingBased Valuation Models • Making accounting information useful in establishing intrinsic value How does a firm create value?

• The value creation concept of valuation Focus of the fundamentals Separate value creating activities from zero value creating activities →It’s the operating activities that add value in a business, so don’t confuse them with the financing activities

Key Thrust of The Accounting-Based Valuation Models (Cont’d)

MVE = CSE + extra value (expectation & speculation)

Abnormal Earnings Valuation Model (AEVM) • AEVM:

฀฀฀฀฀฀+1 ฀฀฀฀฀฀+2 +. . . ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + +(1 + ฀฀)2 (1 + ฀฀)

• Define abnormal earnings, i.e. AE (also known as residual earnings, i.e. RI/RE), ฀฀฀฀฀฀+฀฀ ≡ ฀฀฀฀฀฀+฀฀ − ฀฀฀฀฀฀฀฀฀฀+฀฀−฀฀

AE can also be rewritten in the form of ROE AEt = (ROEt – ρ)*CSEt-1 Note: ρ here is cost of equity

AE > 0 suggests ROE > ρ , i.e. satisfactory earnings power

Deriving the AEVM from the DVM • Ohlson (1995) • Dividend valuation model: ฀฀฀฀฀

฀

∞

฀฀฀฀+1 ฀฀฀฀+2 ฀฀฀฀+฀฀ = + +. . . . . . = � 2 (1 + ฀฀) (1 + ฀฀) 1+฀ ฀ ฀฀=1

฀฀

• Assuming that the ‘clean surplus relation’ holds: ฀฀฀฀฀฀฀฀+฀฀ = ฀฀฀฀฀฀฀฀+฀฀−1 + ฀฀฀฀฀฀+฀฀ − ฀฀฀฀+฀฀

dividends can be written as: ฀฀฀฀+฀฀ = ฀฀฀฀฀฀+฀฀ − (฀฀฀฀฀฀฀฀+฀฀ − ฀฀฀฀฀฀฀฀+฀฀−1 )

Deriving the AEVM (Cont’d) • Abnormal earnings (or residual income) defined previously • at date t+i as follows: ฀฀฀฀฀฀+฀฀ ≡ ฀฀฀฀฀฀+฀฀ − ฀฀฀฀฀฀฀฀฀฀+฀฀−1 which implies that:

฀฀฀฀฀฀+฀฀ ≡ ฀฀฀฀฀฀+฀฀ + ฀฀฀฀฀฀฀฀฀฀+฀฀−1

dt+i ≡ AEt+i – CSEt+i + (1+ ρ) CSEt+i-1 • Replacing dividends with earnings less the change in the book value of equity and then replacing earnings with abnormal earnings plus opening book value of equity gives the AEVM: ฀฀฀฀฀฀+1 ฀฀฀฀฀฀+2 +. . . . . . ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + + (1 + ฀฀) (1 + ฀฀)2

Example: GE

The following data is available for GE. Cost of equity is 10% and assume abnormal earnings is expected to grow at 4% from 2004. The book value per share is 4.32 at year end of 1999. Calculate equity value per share using AEVM. 1999A

2000F

2001F

2002F

2003F

2004F

EPS

1.29

1.38

1.42

1.5

1.6

DPS

0.57

0.66

0.73

0.77

0.82

A= Actual, F= Forecast, BPS= Book value per share, EPS=Earnings per share, DPS= Dividend per share

Clean-surplus: BPS2000=BPS1999+EPS2000-DPS2000

1999A

Abnormal earnings: AE2000=NI2000- ρ*CSE1999

GE Case 2000F

2001F

2002F

2003F

2004F

EPS

1.29

1.38

1.42

1.5

1.6

DPS

0.57

0.66

0.73

0.77

0.82

0.78

0.724

0.634

0.584

10.04

BPS

4.32

AE@10% Present Value (PV) of AE Total PV to 2004

Value per share

0.882 (0.1 - 0.04)1.14

03/03/2001 03/05/2001 03/07/2001 03/09/2001 03/11/2001 03/01/2002

03/05/2002 03/07/2002 03/09/2002 03/11/2002

17.08 18.22 19.38 20.59 21.88

03/01/2003

Intrinsic value 1999 Intrinsic value 2000 Intrinsic value 2001 Intrinsic value 2002 Intrinsic value 2003

03/03/2002

GE Price Chart (2000-2003)

03/01/2001

60

03/11/2000

50

03/09/2000

40

03/07/2000

30

03/05/2000

20

03/03/2000

10

0 03/01/2000

Value Drivers in the AEVM • We can write the AEVM as follows: ฀฀฀฀฀฀+1 − ฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀+2 − ฀฀฀฀฀฀฀฀฀฀+1 ฀฀฀฀฀฀+3 − ฀฀฀฀฀฀฀฀฀฀+2 + ... + + 1+฀ ฀ 3 (1 + ฀฀) 1+฀ ฀ 2

฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + Abnormal Returns

= ฀฀฀฀฀฀฀ ฀ +

(฀฀฀฀฀฀฀฀+1 − ฀฀)฀฀฀฀฀฀฀฀(฀฀฀฀฀฀฀฀+2 − ฀฀)฀฀฀฀฀฀฀฀+1(฀฀฀฀฀฀฀฀+3 − ฀฀)฀฀฀฀฀฀฀฀+2 + + +. . . Growth 1+฀ ฀ 2 1+฀ ฀ 1 1+฀ ฀ 3

= ฀฀฀฀฀฀฀ ฀ +

where

in equity

(฀฀฀฀฀฀฀฀+1 −฀฀)(฀฀฀฀฀฀฀฀+2 −฀฀)(1+฀฀฀฀+1 ) (฀฀฀฀฀฀฀฀+3 −฀฀)(1+฀฀฀฀+1 )(1+฀฀฀฀+2 ) +. . . . . . + + 1+฀฀ 3 1+฀฀ 2 1+฀฀

฀฀฀฀฀฀฀฀+฀฀ ≡ ฀฀฀฀฀฀+฀฀ /฀฀฀฀฀฀฀฀+฀฀−฀฀ is expected

฀฀฀฀฀฀฀฀

ROE in period t+i and ฀฀฀฀+฀฀ ≡ (฀฀฀฀฀฀฀฀+฀฀ /฀฀฀฀฀฀฀฀+฀฀−฀฀ − ฀฀ is)expected growth in book value of equity in period t+i.

Drivers of Abnormal Earnings ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ +

(฀฀฀฀฀฀฀฀+1 − ฀฀)

1+฀

฀

+

(฀฀฀฀฀฀ (฀฀฀฀฀฀฀฀+2 − ฀฀)(1 + ฀฀฀฀+1 ) ฀฀+3 − ฀฀)(1 + ฀฀฀฀+1 )(1 + ฀฀฀฀+2 +.). . + 3 1 + ฀ ฀ 2 1+฀ ฀

1. ROE vs. required return, i.e. cost of equity − − −

If forecasted ROE equals the required return, then AE will be zero, and V = CSE If forecasted ROE is greater than the required return, then V > CSE If forecasted ROE is less than the required return, then V < CSE

2. Growth in book value of equity (net assets: CSE) −

Put in place to earn ROE

So…. The Implication AE will change with change with ROE and growth in book value of equity ΔAE = (NI1 – ρCSE0) – (NI0 – ρCSE-1) = ΔNI – ρΔCSE

In case of no dividends and therefore, given that CSE0 = CSE-1 + NI0 ΔAE = (NI1 – NI0) – ρ(CSE-1 + NI0 - CSE-1) = ΔNI - ρNI0

Analysis of Growth in Equity Investment Accounting equation: NOA = NFO + CSE SO ∆CSE = ΔNOA - ΔNFO 1 Sales But, as ATO = NOA , NOA = Sales× ATO 1 Hence, ∆CSE = ∆ Sales × ATO - ΔNFO These components of growth in equity investment: 1. Growth in sales 2. Change in net operating assets that support each dollar of sales 3. Change in the amount of net debt that is used to finance the change in net operating assets rather than equity

Implication 1: AE = Zero Scenario • AE1 = AE0 = 0 • NI1 – ρe*CSE0 = NI0 – ρe*CSE-1 = 0 → ROE = ρe

• What does this imply? →How do analysts explain the zero AE condition? →Intrinsic value of equity(t)= CSEt

Implication 2: Zero AE Growth Scenario • AE1 = AE0, i.e. AE1 – AE0 = 0 • NI1 – ρe*CSE0 = NI0 – ρe*CSE-1 PPE INC. (WACC = 10%; cost of equity = 12%) Year 0 Year -1 NOA 74.4 69.9 NFO 7.7 7.4 CSE 66.7 62.5 Operating income (OI or NOPAT) 9.8 Net income 9.5

Implications 2: Zero AE Growth Scenario (Cont’d) 1. AE0 = 9.5 – 12%*62.5 = 2 2. AE1 = AE0 = 9.5 – 12%*62.5 = 2 3. AE1 = 2 = Net income1 – 12%*66.7; 4. Net income1 = 2 + 12%*66.7 = 10.004 or Net income1 = 9.5 – 12%*62.5 + 12%*66.7 = 9.5 + 12% (66.7 – 62.5) → Δ Net income = 12% * (66.7 – 62.5) = ρΔCSE

Summary: Zero AE Growth Scenario 1. No growth does not mean that there is no growth in profit and net assets, BUT ΔNI = ρΔCSE; Capex can only earn the required rate of return, ρe, no more! 2. AE0=AE1=AEt+1. Thus, AE becomes constant. → The intrinsic value of equity in Year 0 = CSE0 + AE/ρ →Where ρ = cost of equity

Cases of Growth Based on Abnormal Earnings

A Corp.

Company: General Electric

(Dollar amounts in millions)

2002

2001

2000

1999

1998

1997

Sales Sales growth rate Common equity Common equity growth rate ROE Residual earnings Abnormal earnings growth

131,698 4.6% 68,706 16.2% 25.8% 7,539 (86)

125,913 (3.0%) 54,824 8.6% 27.1% 7,625 (3)

129,853 16.3% 50,492 18.6% 29.9% 7,628 1,563

111,630 11.1% 42,557 5.5% 27.6% 6,065 844

100,469 10.6% 38,880 12.97% 26.2% 5,221 227

90,840 14.7% 34,438 10.6% 27.2% 4,994

A (Dollar amounts in millions)

Firm: Reebok 2001

2000

1999

1998

1997

1996

1995

Sales Sales growth rate Common equity

2,993 4.5% 720

2,865 -1.2% 608

2,900 -10.1% 529

3,225 -11.5% 524

3,644 4.7% 507

3,479 −0.1% 381

3,481 6.1% 941

Common equity growth rate

18.4%

14.9%

1.0%

3.4%

33.1%

-59.5%

-5.8%

ROE Residual earnings Abnormal earnings growth

16.9% 30 13

15.3% 17 69

2.1% (52) (20)

5.8% (32) (87)

24.3% 55 12

17.6% 43 (21)

18.6% 64 (91)

Is Nike a Growth Firm? (Dollar amounts in millions)

2004

2003

Sales Sales growth rate Common equity

12,253 14.6% 4,840

10,697 8.1% 4,028

9,893 4.3% 3,839

9,489 5.5% 3,495

8,995 2.5% 3,136

8,777 −8.1% 3,335

Common equity growth rate ROE Residual earnings Abnormal earnings growth

19.8% 23.0% 479 510

4.0% 10.3% (31) (311)

9.8% 19.1% 280 39

11.4% 18.8% 241 31

-6.0% 17.4% 210 146

2.2% 13.0% 64 36

2002

2001

2000

1999

l

Dr. Lisa Liu [email protected] C1.112

IB9Y9B Financial Reporting and Financial Statement Analysis – Valuation Models

5.2. Valuation Models – Abnormal Operating Profit Valuation Model (AOPVM)

Main Outputs of Earnings-based Valuation Models Main Outputs Investment Profit

AEVM Book value of equity (CSE) Profit for the year (net income)

Accounting rate of return

ROE

Minimum required rate of return

Cost of equity

Excess return (excess of minimum required return)

Abnormal earnings (AE)

The Abnormal Operating Profit Valuation Model (AOPVM) ∞

• AOPVM:

฀฀฀฀฀฀฀฀+฀฀ ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + � 1 + ฀฀฀฀฀฀฀฀ ฀฀=1

฀฀

• Define abnormal operating income (also known as residual operating profit; AOP = ReOI) ReOI t ≡ NOPATt − WACC * NOAt −1 Economic value added AOP can also be rewritten in the form of RNOA

ReOI = (RNOAt –WACC)*NOAt-1

The Theoretical Association Between AOPVM And DCF • Free cash flow valuation model: ฀฀฀฀฀

฀

∞

฀฀฀฀฀฀฀฀+฀฀ ฀฀฀฀฀฀฀฀+1 ฀฀฀฀฀฀฀฀+2 +. . . = � = + 2 (1 + ฀฀฀฀฀฀฀฀) (1 + ฀฀฀฀฀฀฀฀) (1 + ฀฀฀฀฀฀฀฀)฀฀ ฀฀=1

• As previously discussed, FCF can be rewritten as follows: ฀฀฀฀฀฀฀฀+฀฀ = ฀฀฀฀฀฀฀฀฀฀฀฀+฀฀ − (฀฀฀฀฀฀฀฀+฀฀ − ฀฀฀฀฀฀฀฀+฀฀−1 )

Deriving the AOPVM • Define abnormal operating income (also known as residual operating profit) at date t+i as follows: AOPt +i ≡ NOPATt +i − WACC * NOA t +i−1

which implies that: NOPATt + i ≡ AOPt +i + WACC * NOA t +i −1 • Replacing FCF with NOPAT less the change in the book value of net operating assets and then replacing NOPAT with abnormal operating profit plus opening book value of net operating assets multiplied by WACC gives the AOPVM: ∞

฀฀฀฀฀฀฀฀+฀฀ ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + � 1 + ฀฀฀฀฀฀฀฀ ฀฀=1

฀฀

Basic Calculation NOPAT for 2015 was £990 m. NOA at the beginning of the year was £3000 m and end of the year was £3900 m. Calculate RNOA, AOP and FCF for the year. WACC was 16%.

RNOA = NOPAT/NOAbeg = 990/3000=33% AOPt +i ≡ NOPATt +i − WACC * NOA t +i −1

AOP = 990 – 0.16*3000 = £510m Or, AOP = (0.33-0.16)*3000= £510 m FCFt +i = NOPATt +i − (NOA t +i − NOA t +i −1 )

FCF = 990 – (3900-3000) = £90m

Practice of Value of Operations Using AOPVM and DCF Forecasting assumptions

2018F

2019F

2020F

Sales

60

78

81.9

NOPAT

4.8

7.8

8.19

NOPM (NOPAT/Sales)

0.08

0.1

0.1

2

2

2

ATO (i.e. Sales/NOAbeg)

After 2020, sales revenue is expected to grow at constant rate of 5% per annum forever and ATO is expected to remain at 2. WACC is 16%.

Forecasting assumptions Sales NOPAT NOPM ATO

2018F 60 4.8 0.08

2019F 78 7.8 0.1

2020F 81.9 8.19 0.1

0 0

1.56 1.159

1.638 11.066

ATO = Sales/NOAbeg

NOA (beg) WACC*N AOP

t+ i

≡ NOPAT − (WACC ) NOA t +i −1 t+i

AOP Present value of AOP

∞

At = NOAt + ∑ i =1

E t [ AOPt +i ]

(1+ WACC )i

= 30 + (0 + 1.159 + 11.066) = £42.23 million

Forecasting assumptions Sales NOPAT NOPM ATO = Sales/NOAbeg

ATO

2018F 60 4.8 0.08 2

2019F 78 7.8 0.1 2

2020F 81.9 8.19 0.1 2

9 -4.2 -3.621

1.95 5.85 4.348

2.047 6.143 41.502

NOA (beg) FCF = NOPAT – Change in NOA

Change in NOA FCF PV of FCF

Change in NOA 2020 = NOA 2021-NOA 2020 ∞

At =

Et [FCFt + i ] i i = 1 (1 + WACC )

∑

NOA2021= Sales2021/ATO2021 = (81.9*1.05)/2 = 42.9975

= -3.621 + 4.348 + 41.502 = £42.23 million

Previously: Value Drivers in the AEVM • We can write the AEVM as follows: ฀฀฀฀฀฀+1 − ฀฀฀฀฀฀฀฀ ฀฀฀฀฀฀฀฀+2 − ฀฀฀฀฀฀฀฀฀฀+1 ฀฀฀฀฀฀+3 − ฀฀฀฀฀฀฀฀฀฀+2 + ... + + 1+฀ ฀ 3 (1 + ฀฀) 1+฀ ฀ 2

฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + Abnormal Returns

= ฀฀฀฀฀฀฀ ฀ +

(฀฀฀฀฀฀฀฀+1 − ฀฀)฀฀฀฀฀฀฀฀(฀฀฀฀฀฀฀฀+2 − ฀฀)฀฀฀฀฀฀฀฀+1(฀฀฀฀฀฀฀฀+3 − ฀฀)฀฀฀฀฀฀฀฀+2 + + +. . . Growth 1+฀ ฀ 2 1+฀ ฀ 1 1+฀ ฀ 3

= ฀฀฀฀฀฀฀ ฀ +

where

in equity

(฀฀฀฀฀฀฀฀+1 −฀฀)(฀฀฀฀฀฀฀฀+2 −฀฀)(1+฀฀฀฀+1 ) (฀฀฀฀฀฀฀฀+3 −฀฀)(1+฀฀฀฀+1 )(1+฀฀฀฀+2 ) +. . . . . . + + 1+฀฀ 3 1+฀฀ 2 1+฀฀

฀฀฀฀฀฀฀฀+฀฀ ≡ ฀฀฀฀฀฀+฀฀ /฀฀฀฀฀฀฀฀+฀฀−฀฀ is expected

฀฀฀฀฀฀฀฀

ROE in period t+i and ฀฀฀฀+฀฀ ≡ (฀฀฀฀฀฀฀฀+฀฀ /฀฀฀฀฀฀฀฀+฀฀−฀฀ − ฀฀ is)expected growth in book value of equity in period t+i.

Drivers of Abnormal Operating Profit ∞

฀฀฀฀฀฀฀฀+฀฀ ฀฀฀฀฀ ฀ = ฀฀฀฀฀฀฀ ฀ + � 1 + ฀฀฀฀฀฀฀฀ ฀฀=1

฀฀

1. RNOA vs. required return, i.e. weighted average cost of capital − − −

If forecasted RNOA = WACC, then AOP = zero, and ฀฀฀฀฀ ฀ = NOA If forecasted RNOA > WACC, then ฀฀฀฀฀ ฀ > NOA If forecasted RNOA < WACC, then ฀฀฀฀฀ ฀ < NOA

2. Growth in book value of NOA −

Put in place to earn core RNOA

So…. The Implication – AOP Drivers AOP will change with change with RNOA and growth in book value of NOA ΔAOP = (NOPAT1 – ρNOA0) – (NOPAT0 – ρNOA-1) = ΔNOPAT – ρΔNOA Where ρ = WACC

The Implication (Cont’d): No AOP Growth Scenario • AOP1 = AOP0, i.e. AOP1 – AOP0 = 0 • NOPAT1 – ρWACC*NOA0 = NOPAT0 – ρWACC*NOA-1 PPE INC. (WACC = 10%; cost of equity = 12%) Year 0 Year -1 NOA 74.4 69.9 NFO 7.7 7.4 CSE 66.7 62.5 Operating income (OI or NOPAT) 9.8 Net income 9.5

The Implication (Cont’d): Zero AOP Growth Scenario 1. AOP0 = 9.8 – 10%*69.9 = 2.81 2. AOP1 = AOP0 = 9.8 – 10%*69.9 = 2.81 3. AOP1 = NOPAT1 – 10%*74.4 = 2.81; 4. NOPAT1 = 2.81 + 10%*74.4 = 10.25 or NOPAT1 = 9.8 – 10%*69.9 + 10%*74.4 = 9.8 + 10% (77.4 – 69.9) →...