Question

Firm A had sales of $23 billion in 2012. Suppose you expected its sales to grow at a rate of 10% in 2013, but then slow by 0.5% per year to the long-run growth rate that is characteristic of the industry—7.5%—by 2018. Based on Firm A’s past profitability and investment needs, you expect EBIT to be 10% of sales, increases in net working capital requirements to be 10% of any increase in sales, and capital expenditures to equal depreciation expenses. If Firm A had $3.5 billion in cash, $1 billion in debt, 900 million shares outstanding, a tax rate of 25%, and a weighted average cost of capital of 10%, what would have been your estimate of the value of Nike stock in early 2013?

I'm not sure how to formulate this onto a spreadsheet, which it's supposed to be. Thanks!

Answer 1

Nike	2012	2013	2014	2015	2016	2017	2018	2019
Growth g		10%	9.5%	9.0%	8.5%	8.0%	7.5%	7.50%
Sales	$   23.00	$   25.30	$   27.70	$   30.20	$   32.76	$   35.38	$   38.04	$   40.89
EBIT		$     2.53	$     2.77	$     3.02	$     3.28	$     3.54	$     3.80
NWC		$     0.24	$     0.25	$     0.26	$     0.26	$     0.27	$     0.29
FCF		$     1.66	$     1.83	$     2.01	$     2.20	$     2.39	$     2.57
Terminal (TV)						$ 102.70
Firm Value (EV)	$71.28
Equity	$73.78
Stock Price	$81.98

Free Cash Flow (FCF) = EBIT x (1 - tax) - NWC

Terminal Value (TV) = FCF (2018) / (WACC - g)

Firm Value (EV) = NPV of all FCF + TV

Equity Value = EV - Debt + Cash

Stock Price = Equity / No. of shares