Question

Consider the following data for Nike Inc. In 2009 it had $19.100 million n sales with a 10% growth rate in 2010, but then slows by 1 % to the long-run growth rate of 5% by 2015. Nike expects EBIT to be 10% of sales increases in networking capital requirements to be 10% of any increases in sales and capital expenditures to 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 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 range of prices or Nike stock ıs consistent with these orecasts? b. Suppose you 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 forecasts? c. Suppose you believe Nike's weighted average cost of capital s between 9.5% and 12%, hat range of prices or Nike stock s consistent with these recasts d. What range of stock prices is consistent if you vary the estimates as in parts (a), b), and (c) simultaneously? a. Suppose you believe Nikes 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 stock is consistent with these forecasts? The range of prices will be: Highest price share:(Round to the nearest cent) Lowest price share: $ Round to the nearest cent.) b Suppose you believe Nike's initial revenue EBIT margin will be between 9% and 11% of saes. What range o prices for Nike stock s cons sent it these orecasts? The range of prices will be: Highest price per share: (Round to the nearest cent) Lowest price per share Round to the nearest cent.) c. Suppose you believe Nike's weighted average cost of capita s between 9.5% and 12%, What range of prices for Nike stock s consistent th these forecasts? The range of prices will be: Round to the nearest cent.) c Suppose you believe Nike's weighted average cost of capital is between 9 5% and 12% what range o p es for Nike stock scor sister with these forecasts? The range of prices will be: Highest price per share: S . (Round to the nearest cent.) Lowest price per share: (Round to the nearest cent.) d. Compute the stock prices when the initial revenue growth begins at 79 he EBIT IS 9% of sales, and he WACC s 12%. Then compute the stock price when he initial revenue growth begins at 119 the E is 11% of sales, and the company's WACC is 9.5%. What is the range of prices under these scenarios? The range of prices will be: Highest price per share: S(Round to the nearest cent.) Lowest price per share: (Round to the nearest cent.)

Answer 1

This is the basic valuation model:

	Time period	1	2	3	4	5	5
Formula	Year (n)	2010	2011	2012	2013	2014	Terminal
	Growth rate (%) (g)	10.00%	9.00%	8.00%	7.00%	6.00%	5.00%
(Sn-1*(1+g))	Sales (S)	21,010	22,901	24,733	26,464	28,052	29,455
(Sn-Sn-1)	Increase in sales	1,910	1,891	1,832	1,731	1,588	1,403
10% of sales	EBIT	2,101	2,290	2,473	2,646	2,805	2,945
24%*EBIT	Tax @ 24%	504	550	594	635	673	707
(EBIT-Tax)	Net income (NI)	1,597	1,740	1,880	2,011	2,132	2,239
10% of increase in sales	Increase in NWC	191	189	183	173	159	140
(NI + Increase in NWC) Since capex = dep., its effect will get neutralised in the FCF.	FCF	1,788	1,930	2,063	2,184	2,291	2,379
FCFYear5/(WACC-long-run growth rate)	Terminal FCF						47,576
	Total FCF	1,788	1,930	2,063	2,184	2,291	47,576
1/(1+d)^n	Discount factor @ 10%	0.909	0.826	0.751	0.683	0.621	0.621
(Total FCF*Discount factor)	PV of FCF	1,625	1,595	1,550	1,492	1,422	29,541
Sum of all PVs	Enterprise value	37,225.39
	Less: Debt	(32.00)
	Add: Cash	2,300.00
	Equity value	39,493.39
	Shares O/S	486.00
	Price/share	81.26

Using this base case model and changing the variables as specified in respective questions, price per share will be evaluated.

a).

	2010	2015	Linear growth rate decrease/year (g2015 - g2010)/5	Enterprise value	Equity value	Price/share ($)
Growth rate	7%	5.00%	0.40%	34,267.75	36,535.75	75.18
Growth rate	11%	5.00%	1.20%	38,251.45	40,519.45	83.37

b).

		Enterprise value	Equity value	Price/share ($)
EBIT margin	9.00%	33,745.47	36,013.47	74.10
EBIT margin	11.00%	40,705.30	42,973.30	88.42

c).

		Enterprise value	Equity value	Price/share ($)
WACC	9.50%	41,367.57	43,635.57	89.79
WACC	12.00%	26,573.81	28,841.81	59.35

d).  

Initial growth rate	EBIT	WACC	Enterprise value	Equity value	Price/share ($)
7.00%	9.00%	12.00%	22,177.37	24,445.37	50.30
11.00%	11.00%	9.50%	46,481.17	48,749.17	100.31

Note: The valuation for each of these variations could not be uploaded due to the answer word limit.