Forecasting with Parsimonious Method and Estimating Share Value... Forecasting with Parsimonious Method and Estimating Share Value
Question:
Forecasting with Parsimonious Method and Estimating Share Value...
Forecasting with Parsimonious Method and Estimating Share Value Using the DCF Model
Following are income statements and balance sheets for
Nike Inc
NIKE INC.
Consolidated Income Statements
For Year Ended ($ millions)
May 31, 2019 May 31, 2018
Revenues .................................................... $39,117 $36,397
Cost of sales.................................................. 21,643
20,441
Gross profit ................................................. 17,474 15,956
Demand creation expense ....................................... 3,753 3,577
Operating overhead expense ..................................... 8,949 7,934
Total selling and administrative expense .......................... 12,702 11,511
Interest expense (income), net.................................... 49 54
Other (income) expense, net ..................................... (78) 66
Income before income taxes ..................................... 4,801 4,325
Income tax expense ............................................ 772 2,392
Net income ................................................... $ 4,029 $ 1,933
NIKE INC.
Consolidated Balance Sheets
$ millions
May 31, 2019 May 31, 2018
Current assets
Cash and equivalents ......................................... $ 4,466 $ 4,249
Short-term investments........................................ 197 996
Accounts receivable, net....................................... 4,272 3,498
Inventories ................................................. 5,622 5,261
Prepaid expenses and other current assets ........................ 1,968 1,130
Total current assets ............................................ 16,525 15,134
Property, plant and equipment, net............................... 4,744 4,454
Identifiable intangible assets, net ................................ 283 285
Goodwill ................................................... 154 154
Deferred income taxes and other assets .......................... 2,011
2,509
Total assets .................................................. $23,717 $22,536
NIKE INC.
Consolidated Balance Sheets
$ millions
May 31, 2019 May 31, 2018
Current liabilities
Current portion of long-term debt ................................ $ 6 $ 6
Notes payable ............................................... 9 336
Accounts payable ............................................ 2,612 2,279
Accrued liabilities ............................................ 5,010 3,269
Income taxes payable ......................................... 229 150
Total current liabilities ........................................... 7,866 6,040
Long-term debt .............................................. 3,464 3,468
Deferred income taxes and other liabilities ......................... 3,347 3,216
Commitments and contingencies (Note 18)
Shareholders' equity
Common stock at stated value:
Class A convertible—315 and 329 shares outstanding.............. — —
Class B—1,253 and 1,272 shares outstanding.................... 3 3
Capital in excess of stated value ................................ 7,163 6,384
Accumulated other comprehensive income (loss) ................... 231 (92)
Retained earnings............................................ 1,643
3,517
Total shareholders' equity........................................ 9,040 9,812
Total liabilities and shareholders' equity ............................. $23,717 $22,536
NIKE INC.
Consolidated Balance Sheets
$ millions
May 31, 2019 May 31, 2018
Current liabilities
Current portion of long-term debt ................................ $ 6 $ 6
Notes payable ............................................... 9 336
Accounts payable ............................................ 2,612 2,279
Accrued liabilities ............................................ 5,010 3,269
Income taxes payable ......................................... 229 150
Total current liabilities ........................................... 7,866 6,040
Long-term debt .............................................. 3,464 3,468
Deferred income taxes and other liabilities ......................... 3,347 3,216
Commitments and contingencies (Note 18)
Shareholders' equity
Common stock at stated value:
Class A convertible—315 and 329 shares outstanding.............. — —
Class B—1,253 and 1,272 shares outstanding.................... 3 3
Capital in excess of stated value ................................ 7,163 6,384
Accumulated other comprehensive income (loss) ................... 231 (92)
Retained earnings............................................ 1,643
3,517
Total shareholders' equity........................................ 9,040 9,812
Total liabilities and shareholders' equity $23,717, $22,536
continued from previous page
NIKE INC.
Consolidated Balance Sheets
$ millions
May 31,
2019
May 31,
2018
Current liabilities
Current portion of long-term debt ................................ $ 6 $ 6
Notes payable ............................................... 9 336
Accounts payable ............................................ 2,612 2,279
Accrued liabilities ............................................ 5,010 3,269
Income taxes payable ......................................... 229 150
Total current liabilities ........................................... 7,866 6,040
Long-term debt .............................................. 3,464 3,468
Deferred income taxes and other liabilities ......................... 3,347 3,216
Commitments and contingencies (Note 18)
Shareholders' equity
Common stock at stated value:
Class A convertible—315 and 329 shares outstanding.............. — —
Class B—1,253 and 1,272 shares outstanding.................... 3 3
Capital in excess of stated value ................................ 7,163 6,384
Accumulated other comprehensive income (loss) ................... 231 (92)
Retained earnings............................................ 1,643
3,517
Total shareholders' equity........................................ 9,040 9,812
Total liabilities and shareholders' equity ............................. $23,717 $22,536
Required
a. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for 2019. The com‑
pany's NNO is negative because cash exceeds debt.
b. Compute net operating profit after tax (NOPAT) for 2019 assuming a federal and state statutory tax
rate of 22%.
c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 13‑4, to fore‑
cast sales, NOPAT, and NOA for 2020 through 2023 using the following assumptions.
Sales growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8%
Net operating profit margin (NOPM). . . . . . . . . . . . 2019 ratios rounded to three decimal places
Net operating asset turnover (NOAT), year-end. . . 2019 ratios rounded to three decimal places
Forecast the terminal period value assuming a 2% terminal period growth and using the NOPM and
NOAT assumptions above.
d. Estimate the value of a share of Nike's common stock using the discounted cash flow (DCF) model as
of May 31, 2019; assume a discount rate (WACC) of 6.8% and common shares outstanding of 1,682
million.
e. Nike's stock closed at $86.70 on July 23, 2019, the date the Form 10‑K was filed with the SEC.
How does your valuation estimate compare with this closing price? What do you believe are some
reasons for the difference? What investment decision is suggested from your results?
Expert Answer:
Financial reporting, financial statement analysis and valuation a strategic perspective
ISBN: 978-0324789416
7th Edition
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw
