Question

Consider the following data for Nike Inc : In 2009 it had $19.300 million in sales with a 10% growth rate in 2010, but then slows by 1% to the long-un growth ate of 5% by 2015, Nike expects EBIT to be 10% of sales, increases in net working capital requirements to be 10% of any increases equal depreciation expenses. Nike also has $2.300 million in cash, $32 million in debt, 486 million shares outstanding, a tax rate of 24%, and a weighted average cost in sales, and capital expenditures to al of capital of 10%. a Suppose you believe Nike's initial revenue growth rate will be between 7% and 1 1% with growth slowing linearly to 5% by year 2015). What ange of prices for Nike Me stock is with these forecasts? b Sup ose you be eve N kes initia venue EIT margin wil be between 9% and 1 t % of saes. What range of prices for Nike stock is consistent with these forecasts? c Suppose you believe Nike's weighted average cost of capital is between 9.5% and 12%. What range of prices for Nike stock is consistent with these forecasts? d. What range of stock prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously? d 11% with growth slowing in early to 5% by year 2015 What range of prices for Nike a. Suppose you believe Nike's initial revenue growth rate will be between 7% an stock is consistent with these forecasts? Round to the nearest cent.) Lowest price share:(Round to the nearest cent.) b. Suppose you The range of prices will be Highest price per share: S(Round to the nearest cent.) believe Nike's initial revenue EBIT margin will be between 9% and 11% of sales. What range of prices for Nike stock is consistent with these Enter your answer in each of the answer boxes Chapter 13 Homework (Required

Answer 1

Hi,

Please find the answers:-

a) $57.67, $64.18

b) $55.27, $69.75

Workings are:

Information Provided:-

Cash (mn)	2300
Debt (mn)	32
shares o/s (mn)	486
Tax	24%
WACC	10%

Calculating Free Cash flows for calculating the Stock price:-

Year	2009	2010	2011	2012	2013	2014	2015
Sales (mn)	19,300	21,230	23,141	24,992	26,741	28,346	29,763
Growth rate		10%	9%	8%	7%	6%	5%
EBIT (10%)		2,123	2,314	2,499	2,674	2,835	2,976
Tax (24%)		510	555	600	642	680	714
Increase in WC (10% of increae in sales)		193	191	185	175	160	142
Free cash flow		1,420	1,568	1,714	1,857	1,994	2,120
PV of cash flows		1,291	1,296	1,288	1,269	1,238	1,197

Calculating the current stock price:

Terminal Value of the firm is equal to TV = (FCFn x (1 + g)) / (WACC – g)

in this case we have g as 5% and WACC as 10% and FCF at n as 2120 substituting these in the formula we get =2120*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $44520 mn

Now we will compute Present value of all cash flows and terminal value PV of Terminal Value =44520/(1.1)^6            25,130 Sum of PV of Cash flows above               7,578 Total PV of cash flows (mn)            32,709 Excluding cash and Debt            30,377 Value of each share (32,538/486)               62.50 Now lets vary the sales growth from 10% to 7% Year 2009 2010 2011 2012 2013 2014 2015 Sales (mn)                    19,300            20,651          22,014                  23,379          24,735          26,070          27,374 Growth rate 7.00% 6.60% 6.20% 5.80% 5.40% 5.00% EBIT (10%)               2,065            2,201                     2,338            2,473            2,607            2,737 Tax (24%)                  496                528                        561                594                626                657 Increase in WC (10% of increae in sales)                  135                136                        136                136                134                130 Free cash flow               1,434            1,537                     1,640            1,744            1,848            1,950 PV of cash flows               1,304            1,270                     1,232            1,191            1,147            1,101

Calculating the current stock price:

Terminal Value of the firm is equal to TV = (FCFn x (1 + g)) / (WACC – g)

in this case we have g as 5% and WACC as 10% and FCF at n as 1950 substituting these in the formula we get =1950*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $40950 mn

Now we will compute Present value of all cash flows and terminal value

PV of Terminal Value	=40950/(1.1)^6	23,115
Sum of PV of Cash flows above		7,246
Total PV of cash flows (mn)		30,361
Excluding cash and Debt		28,029
Value of each share (32,538/486)		57.67

Now lets vary the sales growth from 10% to 11%
Year	2009	2010	2011	2012	2013	2014	2015
Sales (mn)	19,300	21,423	23,522	25,545	27,436	29,137	30,594
Growth rate		11.00%	9.80%	8.60%	7.40%	6.20%	5.00%
EBIT (10%)		2,142	2,352	2,555	2,744	2,914	3,059
Tax (24%)		514	565	613	658	699	734
Increase in WC (10% of increae in sales)		212	210	202	189	170	146
Free cash flow		1,416	1,578	1,739	1,896	2,044	2,179
PV of cash flows		1,287	1,304	1,307	1,295	1,269	1,230

Calculating the current stock price:

Terminal Value of the firm is equal to TV = (FCFn x (1 + g)) / (WACC – g)

in this case we have g as 5% and WACC as 10% and FCF at n as 2179 substituting these in the formula we get =2179*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $45759 mn

Now we will compute Present value of all cash flows and terminal value PV of Terminal Value =45759/(1.1)^6            25,830 Sum of PV of Cash flows above               7,692 Total PV of cash flows (mn)            33,522 Excluding cash and Debt            31,190 Value of each share (32,538/486)               64.18 For Part B we need to change EBIT margins 7% Year 2009 2010 2011 2012 2013 2014 2015 Sales (mn)                    19,300            21,230          23,141                  24,992          26,741          28,346          29,763 Growth rate 10% 9% 8% 7% 6% 5% EBIT (10%)               1,911            2,083                     2,249            2,407            2,551            2,679 Tax (24%)                  459                500                        540                578                612                643 Increase in WC (10% of increae in sales)                  193                191                        185                175                160                142 Free cash flow               1,259            1,392                     1,524            1,654            1,778            1,894 PV of cash flows               1,145            1,150                     1,145            1,130            1,104            1,069 Calculating the current stock price: Terminal Value of the firm is equal to TV = (FCFn x (1 + g)) / (WACC – g) in this case we have g as 5% and WACC as 10% and FCF at n as 1894 substituting these in the formula we get =1894*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $39775.5 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value =39775.5/(1.1)^6            22,452 Sum of PV of Cash flows above               6,743 Total PV of cash flows (mn)            29,196 Excluding cash and Debt            26,864 Value of each share (32,538/486)               55.27 Calculating the current stock price: Terminal Value of the firm is equal to TV = (FCFn x (1 + g)) / (WACC – g) in this case we have g as 5% and WACC as 10% and FCF at n as 2346 substituting these in the formula we get =2346*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $49275.9 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value =49275.9/(1.1)^6            27,815 Sum of PV of Cash flows above               8,413 Total PV of cash flows (mn)            36,228 Excluding cash and Debt            33,896 Value of each share (32,538/486)               69.75 Attaching screenshots for easier comprehension:- Cash (mn) Debt (mn) shares o/s (mn) Tax WACC 2300 32 486 24% 10% 2012 24,992 Year Sales (mn) Growth rate EBIT (10%) Tax (24%) increase in WC (10% of increae in sales) Free cash flow PV of cash flows 2009 2010 21,230 10% 2,123 510 193 1,420 1,291 2011 23,141 9% 2,314 2013 2014 28,346 2015 29,763 19,300 26,741 8% 2,499 600 185 1,714 1,288 7% 6% 5% 191 1,568 1,296 2,674 642 175 1,857 1,269 2,835 680 160 1,994 1,238 2,976 714 142 2,120 1,197 Calculating the current stock price Terminal Value of the firm is equal to TV (FCFn x (1g)) (WACC-g) in this case we have g as 5% and WACC as 10% and FCF at n as 2120 substituting these in the formula we get-2120*(( 1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $44520 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value Sum of PV of Cash flows above Total PV of cash flows (mn) Excluding cash and Debt Value of each share (32,538/486) 44520/(1.1)A6 25,130 7,578 32,709 30,377 62.50 Now lets vary the sales growth from 10% to 7% Year Sales (mn) Growth rate EBIT (10%) Tax (24%) increase in WC (10% of increae in sales) Free cash flow PV of cash flows 2009 2010 2011 22,014 2012 23,379 6% 2,338 561 136 1,640 1,232 2013 2014 2015 27,374 0.004 24,735 6% 2,473 594 136 1,744 1,191 19,300 20,651 26,070 7% 7% 5% 5% 2,065 496 135 1,434 1,304 2,201 528 136 1,537 1,270 2,607 626 134 1,848 1,147 2,737 657 130 1,950 1,101 Calculating the current stock price Terminal Value of the firm is equal to TV (FCFn x (1+g) / (WACC-g) in this case we have g as 5% and wACC as 10% and FCF at n as 1950 substituting these in the formula we get =1950*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $40950 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value Sum of PV of Cash flows above Total PV of cash flows (mn) Excluding cash and Debt Value of each share (32,538/486) 40950/(1.1)A6 23,115 7,246 30,361 28,029 57.67 Now lets vary the sales growth from 10% to 11% Year Sales (mn) Growth rate EBIT (10%) Tax (24%) increase in WC (10% of increae in sales) Free cash flow PV of cash flows 2009 2010 21,423 2011 23,522 10% 2,352 565 210 1,578 1,304 2012 25,545 9% 2013 27,436 2014 29,137 696 2,914 699 170 2,044 1,269 2015 30,594 5% 3,059 734 146 2,179 1,230 6 19,300 0.012 11% 7% 2,142 514 212 1,416 1,287 2,555 613 202 1,739 1,307 2,744 658 189 1,896 1,295 Calculating the current stock price Terminal Value of the firm is equal to TV(FCFn x(1g)) (WACC-g) in this case we have g as 5% and WACC as 10% and FCF at n as 2179 substituting these in the formula we get-21794(1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $45759 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value Sum of PV of Cash flows above Total PV of cash flows (mn) Excluding cash and Debt Value of each share (32,538/486) 45759/(1.1)A6 25,830 7,692 33,522 31,190 64.18 For Part B we need to change EBIT margins 7% Year Sales (mn) Growth rate EBIT (10%) Tax (24%) increase in WC (10% of increae in sales) Free cash flow PV of cash flows 2009 2010 2011 2012 2013 26,741 2014 28,346 696 2015 29,763 19,300 21,23023,141 24,992 10% 1,911 459 193 1,259 1,145 9% 8% 2,249 540 185 1,524 1,145 7% 5% 2,083 500 191 1,392 1,150 2,407 578 175 1,654 1,130 2,551 612 160 1,778 1,104 2,679 643 142 1,894 1,069 Calculating the current stock price Terminal Value of the firm is equal to TV(FCFn x (1g)) (WACC-g) in this case we have g as 5% and WACC as 10% and FCF at n as 1894 substituting these in the formula we get =1894*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $39775.5 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value Sum of PV of Cash flows above Total PV of cash flows (mn) Excluding cash and Debt Value of each share (32,538/486) :39775/(1.1) 22,452 6,743 29,196 26,864 55.27 2012 24,992 2013 Year Sales (mn) Growth rate EBIT (10%) Tax (24%) increase in WC (10% of increae in sales) Free cash flow PV of cash flows 2009 2010 21,230 10% 2,335 560 193 1,582 1,438 2011 23,141 9% 2,545 611 191 1,743 1,441 2014 28,346 696 3,118 748 160 2,209 1,372 2015 29,763 19,300 26,741 8% 790 5% 2,749 660 185 1,904 1,431 2,942 706 175 2,061 1,407 3,274 786 142 2,346 1,325 Calculating the current stock price Terminal Value of the firm is equal to TV(FCFn x(1g)) / (WACC-g) in this case we have g as 5% and WACC as 10% and FCF at n as 2346 substituting these in the formula we get-2346*((1+0.05)/(0.1-0.05)) Terminal Value of Nike as: $49275.9 mn Now we will compute Present value of all cash flows and terminal value PV of Terminal Value Sum of PV of Cash flows above Total PV of cash flows (mn) Excluding cash and Debt Value of each share (32,538/486) 49275.9/(1.1) 27,815 8,413 36,228 33,896 69.75 Thanks