Reference no: EM132466458
Benchmark case:
On June 27th 2019, Nike Inc. had reported sales of $39,117 million in fiscal year 2019.
You expect its sales to grow at a rate of 9% in 2020, at a rate of 8% in 2021, at a rate of 7.5% in 2022.
Thereafter, the growth will level off at its long-run growth rate of 7%. Use the following forecasts to estimate Nike's free cash flows:
- Given the company's recent operating margin, you estimate that Earnings Before Interest and Taxes (EBIT) is 13% of sales every year.
- The depreciation expense is expected to be 1.5% of sales every year.
- Increases in net working capital requirements will be 20% of any increase in sales.
- There are no capital expenditures in any year.
The other assumptions:
- Tax rate is 24%.
- The firm's WACC is 10%.
- Nike has $3464 million in debt, $4466 million in cash, and 1618 million shares outstanding in 2019.
1. By using the free cash flow model, what is the intrinsic value of Nike's stock in June 2019? (Benchmark case)
For the following questions, all assumptions remain the same as the benchmark case.
2. Suppose the firm's WACC is (10.5) %. What is the intrinsic value of Nike's stock in June 2019?
3.Suppose the increase in net working capital will be (21.5 ) % of any increase in sales. What is the intrinsic value of Nike's stock in June 2019?
4. Suppose the firm's long-run growth rate is (6.2) %. What is the intrinsic value of Nike's stock in June 2019?
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