Question
In: Finance
Starting with your identified 2019 level of revenue, you expect that revenue will increase by 10%...
Starting with your identified 2019 level of revenue, you expect that revenue will increase by 10% in 2020. You anticipate annual revenue growth will slow by 1% per year to the long-run industry growth rate of 5% by 2025. • You expect EBIT to be 12.5% of sales each year. • You expect any increase in net working capital requirements each year to be 10% of any year-on-year annual increases in revenue. • You expect capital expenditures to equal depreciation expenses in each year. • Nike’s Tax rate is 20%. • Nike’s weighted average cost of capital (WACC) is 9%.
Case 1 - Suppose you believe Nike's initial revenue growth rate in 2020 will be between 8% and 14% (with growth slowing linearly to 5% by year 2025). What range of prices for Nike stock is consistent with these forecasts? Case 2 – Beginning again with your base case assumptions, suppose you believe Nike's initial EBIT margin (as a % of revenue) will be between 9% and 14% of revenue. What range of prices for Nike stock is consistent with these forecasts? Case 3 – Beginning again with your base case assumptions, you observe that similar companies in the apparel industry have WACCs ranging from 7.5% to 10%. What range of prices for Nike stock is consistent with these forecasts? Case 4 - What range of stock prices is consistent if you vary the estimates in cases 1 – 3 simultaneously? Put another way, what is the range of stock prices you might expect if the worst/best case scenarios occur from each of the previous three cases simultaneously.
7) Determine a terminal value for Nike’s FCF from 2026 and beyond (value expressed in millions of 2025 dollars).
The terminal value, in 2025 dollars, of Nike's free cash flows from 2026 onward is:____ million dollars. (please round your answer to ONE decimal point)
8) Determine Nike’s Enterprise Value (as of the end of FY2019)
Nike's Enterprise Value, as of the end of FY2019, is: $____million dollars. (please round your answer to ONE decimal place)
Solutions
Expert Solution
The number of shares outstanding is calculated by dividing Market Cap/Share price and found to be 1561797752
The following tables contain the FCFF calculation and 2026 denotes 2026 onwards which is the terminal value calculated.
In the various scenarios the best case worst case scenarios are calculated and the corresponding share prices are calculated by dividing the NPV with the number of shares outstanding
Case 1 Optimistic scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 14.0% | 12.2% | 10.4% | 8.6% | 6.8% | 5.0% | ||
| EBIT margin | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | |
| WACC | 9% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% |
| Revenue | 39117000 | 44593380 | 50033772 | 55237285 | 59987691 | 64066854 | 67270197 | |
| EBIT | 4889625 | 5574173 | 6254222 | 6904661 | 7498461 | 8008357 | 8408775 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 3911700 | 4459338 | 5003377 | 5523728 | 5998769 | 6406685 | 6727020 | |
| WC Changes | 547638 | 544039.2 | 520351.2 | 475040.6 | 407916.3 | 320334.3 | ||
| FCFF | 3911700 | 4459338 | 5003377 | 5523728 | 5998769 | 6406685 | 168175492.2 | |
| DCF | 3588716 | 3753336 | 3863525 | 3913149 | 3898788 | 3820097 | 91997753.37 | |
| NPV | 1.14835E+11 | |||||||
| Share Price | 73.52767899 |
Case 1 Pessimistic Scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 8.0% | 7.4% | 6.8% | 6.2% | 5.6% | 5.0% | ||
| EBIT margin | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | |
| WACC | 9% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% |
| Revenue | 39117000 | 42246360 | 45372591 | 48457927 | 51462318 | 54344208 | 57061418 | |
| EBIT | 4889625 | 5280795 | 5671574 | 6057241 | 6432790 | 6793026 | 7132677 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 3911700 | 4224636 | 4537259 | 4845793 | 5146232 | 5434421 | 5706142 | |
| WC Changes | 312936 | 312623.1 | 308533.6 | 300439.1 | 288189 | 271721 | ||
| FCFF | 3911700 | 4224636 | 4537259 | 4845793 | 5146232 | 5434421 | 142653546.2 | |
| DCF | 3588716 | 3555792 | 3503596 | 3432882 | 3344698 | 3240368 | 78036374.94 | |
| NPV | 98702425484 | |||||||
| Share Price | 63.19795589 |
Case 2 Optimistic Scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 10.0% | 9.0% | 8.0% | 7.0% | 6.0% | 5.0% | ||
| EBIT margin | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | |
| WACC | 9% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% |
| Revenue | 39117000 | 43028700 | 46901283 | 50653386 | 54199123 | 57451070 | 60323623 | |
| EBIT | 5476380 | 6024018 | 6566180 | 7091474 | 7587877 | 8043150 | 8445307 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 4381104 | 4819214 | 5252944 | 5673179 | 6070302 | 6434520 | 6756246 | |
| WC Changes | 391170 | 387258.3 | 375210.3 | 354573.7 | 325194.7 | 287255.3 | ||
| FCFF | 4428044 | 4865685 | 5297969 | 5715728 | 6109325 | 6468990 | 169811000.1 | |
| DCF | 4062426 | 4095350 | 4091004 | 4049166 | 3970642 | 3857248 | 92892432.22 | |
| NPV | 1.17018E+11 | |||||||
| Share Price | 74.92536587 |
Case 2 Pessimistic Scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 10.0% | 9.0% | 8.0% | 7.0% | 6.0% | 5.0% | ||
| EBIT margin | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | |
| WACC | 9% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% |
| Revenue | 39117000 | 43028700 | 46901283 | 50653386 | 54199123 | 57451070 | 60323623 | |
| EBIT | 3520530 | 3872583 | 4221115 | 4558805 | 4877921 | 5170596 | 5429126 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 2816424 | 3098066 | 3376892 | 3647044 | 3902337 | 4136477 | 4343301 | |
| WC Changes | 391170 | 387258.3 | 375210.3 | 354573.7 | 325194.7 | 287255.3 | ||
| FCFF | 2706896 | 2989634 | 3271834 | 3547763 | 3811282 | 4056046 | 106471195.5 | |
| DCF | 2483391 | 2516315 | 2526456 | 2513325 | 2477072 | 2418487 | 58243390.01 | |
| NPV | 73178436438 | |||||||
| Share Price | 46.85525786 |
Case 3 Optimistic Scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 10.0% | 9.0% | 8.0% | 7.0% | 6.0% | 5.0% | ||
| EBIT margin | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | |
| WACC | 7.5% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% |
| Revenue | 39117000 | 43028700 | 46901283 | 50653386 | 54199123 | 57451070 | 60323623 | |
| EBIT | 4889625 | 5378588 | 5862660 | 6331673 | 6774890 | 7181384 | 7540453 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 3911700 | 4302870 | 4690128 | 5065339 | 5419912 | 5745107 | 6032362 | |
| WC Changes | 391170 | 387258.3 | 375210.3 | 354573.7 | 325194.7 | 287255.3 | ||
| FCFF | 3911700 | 4302870 | 4690128 | 5065339 | 5419912 | 5745107 | 241294494 | |
| DCF | 3638791 | 3723414 | 3775368 | 3792928 | 3775287 | 3722608 | 145441438.8 | |
| NPV | 1.6787E+11 | |||||||
| Share Price | 107.4850021 |
Case 3 Pessimistic Scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 10.0% | 9.0% | 8.0% | 7.0% | 6.0% | 5.0% | ||
| EBIT margin | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | 12.50% | |
| WACC | 10.0% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% |
| Revenue | 39117000 | 43028700 | 46901283 | 50653386 | 54199123 | 57451070 | 60323623 | |
| EBIT | 4889625 | 5378588 | 5862660 | 6331673 | 6774890 | 7181384 | 7540453 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 3911700 | 4302870 | 4690128 | 5065339 | 5419912 | 5745107 | 6032362 | |
| WC Changes | 391170 | 387258.3 | 375210.3 | 354573.7 | 325194.7 | 287255.3 | ||
| FCFF | 3911700 | 4302870 | 4690128 | 5065339 | 5419912 | 5745107 | 120647247 | |
| DCF | 3556091 | 3556091 | 3523763 | 3459694 | 3365339 | 3242963 | 61911114.23 | |
| NPV | 82615055476 | |||||||
| Share Price | 52.89740962 |
Case 4 Combined optimistic scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 14.0% | 12.2% | 10.4% | 8.6% | 6.8% | 5.0% | ||
| EBIT margin | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | 14.00% | |
| WACC | 7.5% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% | 7.50% |
| Revenue | 39117000 | 44593380 | 50033772 | 55237285 | 59987691 | 64066854 | 67270197 | |
| EBIT | 5476380 | 6243073 | 7004728 | 7733220 | 8398277 | 8969360 | 9417828 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 4381104 | 4994459 | 5603783 | 6186576 | 6718621 | 7175488 | 7534262 | |
| WC Changes | 547638 | 544039.2 | 520351.2 | 475040.6 | 407916.3 | 320334.3 | ||
| FCFF | 4446821 | 5059743 | 5666225 | 6243581 | 6767571 | 7213928 | 302984966.7 | |
| DCF | 4136577 | 4378361 | 4561087 | 4675197 | 4714010 | 4674348 | 182625673.6 | |
| NPV | 2.09765E+11 | |||||||
| Share Price | 134.3101264 |
Case 4 combined pessimistic scenario:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
| Revenure growth | 8.0% | 7.4% | 6.8% | 6.2% | 5.6% | 5.0% | ||
| EBIT margin | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% | |
| WACC | 10.0% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% |
| Revenue | 39117000 | 42246360 | 45372591 | 48457927 | 51462318 | 54344208 | 57061418 | |
| EBIT | 3520530 | 3802172 | 4083533 | 4361213 | 4631609 | 4890979 | 5135528 | |
| Tax | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |
| EBIT(1-Tax) | 2816424 | 3041738 | 3266827 | 3488971 | 3705287 | 3912783 | 4108422 | |
| WC Changes | 312936 | 312623.1 | 308533.6 | 300439.1 | 288189 | 271721 | ||
| FCFF | 2728802 | 2954203 | 3180437 | 3404848 | 3624594 | 3836701 | 80570722.91 | |
| DCF | 2480729 | 2441490 | 2389509 | 2325557 | 2250588 | 2165718 | 41345520.55 | |
| NPV | 55399111798 | |||||||
| Share Price | 35.47137374 |
Terminal value is:
| 150809058.7 |
Enterprise Value is:
| 1.03866E+11 |
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