Nike had sales of $25.3 billion in 2012. Suppose you expect its sales to grow at a rate of 10% in 2013, but then slow by 1% per year to the long-run growth rate that is characteristic of the apparel industry — 5% — by 2018. Based on Nike’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 Nike has $3.3 billion in cash, $1.2 billion in debt, 893.6 million shares outstanding, a tax rate of 24%, and a weighted average cost of capital of 10%,
What is your estimate of the value of Nike’s stock in early 2013?
Suppose you believe Nike’s initial revenue growth rate will be between 7% and 11% (with growth always slowing linearly to 5% by year 2018). What range of prices for Nike stock is consistent with these forecasts?
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?
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?
What range of stock prices is consistent if you vary the estimates as in parts (b), (c), and (d) simultaneously?
Use Data Table Functionality to examine the sensitivity of your valuation to both the WACC and the EBIT Margin. Examine WACC ranging from 9.5% to 12% in increments of 0.25% and EBIT margin ranging from 9% to 11% in increments of 0.25%. Use the same input figures as provided in the original question.