Consider the following data for Nike Inc. In2009 it had S192 ninsales with a 10%

ID: 1175952 • Letter: C

Question

Consider the following data for Nike Inc. In2009 it had S192 ninsales with a 10% gr trte i 2010, but then sows by 1% to the lging whate,Sy 2015 Nike expects EBIT to be 10% of sales, increases in net w rking capital expenses Nike aso has S2.300 milion in cash $32 milion n debt 48 million shares outstanding, a tax rate of 24%, and a weighted average cost o apa d 10% a. Suppose you believe Nike's initial revenue growth rate will be between 7 consistent with these forecasts? b. Suppose you believe Nike's initial revenue EBI C. Suppose you believe Nike's weighted d. What range of stock prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously? I requirements to be 10% of any increases in sales, and capital expendtures to equal depreciation % and 11% with growth slowing linearly to 5% by year 2015 what range of prices for Nike stock is T margin will be between 9% and 1 1% of sales. What range of prices for Nike stock is consistent with these forecasts? average cost of capital is between 95% and 12% what range of prices for Nike stock is consistent with these forecasts? to 5% by year 2015). What range of prices for Nike stock is a pose you believe Nike's initial revenue growth rate wil be between 7% and 11% (with growth slowing linearly consistent with these forecasts? The range of prices will be: Highest price share:(Round to the nearest cent) Lowest price share: SL] (Round to the nearest cent.) believe Nike's initial revenue EBIT margin will be between 9% and 1 1% of sales what range of prices for Nike stock is consistent with these forecasts? The range of prices will be: Highest price per share:$(Round to the nearest cent) Lowest price per share:$(Round to the nearest cent.) ~n.nn. Me·n, narital ie hatwwwn 9 5% and 12%. What range of proes for Nike stock is consistent with these forecasts?

Explanation / Answer

Solution:

1. Year

2009

2010

2011

2012

2013

2014

2015

2. FCF Forecast ($ million)

3. Sales

19,250

21,175

23,080.8

24,927.2

26,672.1

28,272.4

29,686

4. Growth versus Prior Year

10%

5. EBIT

2,117.5

2,308.1

2,492.7

2,667.2

2,827.2

2,968.6

6. Less: Income Tax @ 24%

508.2

553.9

598.2

640.1

278.5

712.5

7. Plus: Depreciation

8. Less: Capital expenditures

9. Less: Increase in NWC (10% ? Sales)

192.5

190.6

184.6

174.5

160

141.4

10. Free Cash Flow (5 - 6 - 9)

1,416.8

1,563.6

1,709.9

1852.6

2,388.7

2,114.7

WACC = 10%

Margin = 10%

Initial Revenue Growth = 10%

a. If Nike’s initial revenues growth rate will between 7% and 11% (with growth slowing linearly to 5% by the year end 2018) it will be having the range of prices that will be high when compared to normal losses.

b. If initial revenues of EBIT margin will be between 9% and 11% of sales it will be nearly as same as above sales prices.

c. WACC = (E / V) * Re + (D / V) * Rd * (1 - Tc)

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D = total market value of the firm's financing (equity and debt)

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

This will be low

d. Price varies positively with growth, positively with margin and negatively with WACC.