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VALUATION REPORT: NIKE

Valuation Report: NikeTable of ContentsQuestion 1.............................................................................................................................................2Question 2.............................................................................................................................................5Question 3.............................................................................................................................................6Question 4.............................................................................................................................................7Question 5...........................................................................................................................................10Question 6...........................................................................................................................................11Question 7...........................................................................................................................................13Question 8...........................................................................................................................................14Question 9...........................................................................................................................................16Question 10.........................................................................................................................................17Question 11.........................................................................................................................................18Question 12.........................................................................................................................................19Question 13.........................................................................................................................................20Question 14.........................................................................................................................................21Question 15.........................................................................................................................................23References...........................................................................................................................................241

Valuation Report: NikeQuestion 1Particulars201620152014Current Assets ($ million)150251558713696Current Liabilities ($ million)535863325027Current Ratio2.802.462.72Particulars201620152014Sales ($ million)32,37630,60127,799Accounts Receivables ($million)324133583434Receivables Turnover9.98959.11298.0952Particulars201620152014Cost of Goods Sold ($million)17,40516,53415,353Inventory ($ million)483843373947Inventory Turnover3.603.813.89Particulars201620152014Sales ($ million)32,37630,60127,799Fixed Assets ($ million)352030112834Fixed Assets Turnover9.2010.169.81Particulars201620152014Total Liabilities ($ million)913888907770Shareholders' Equity ($million)122582159710824Debt-Equity Ratio0.750.410.72Particulars201620152014Sales ($ million)32,37630,60127,799Operating Profit ($ million)464242333577Operating Margin14.34%13.83%12.87%Particulars201620152014Sales ($ million)32,37630,60127,799Net Profit ($ million)376032732693Net Profit Margin11.61%10.70%9.69%2

Valuation Report: NikeParticulars201620152014Net Profit ($ million)376032732693Total Assets ($ million)213962159718594Return on Assets17.57%15.15%14.48%Particulars201620152014Operating Profit ($ million)464242333577Total Assets ($ million)213962159718594Current Liabilities ($ million)535863325027Capital Employed ($ million)160381526513567Return on Capital Employed28.94%27.73%26.37%Particulars201620152014EPS ($)2.211.91.52Dividend ($)0.620.540.47Dividend Payout Ratio28.05%28.42%30.92%Plough Back Ratio71.95%71.58%69.08%Market Value per Share ($)55.557.6138.56RatiosThe profitability of Nike is consistent which is evident from operating margin, net profitmargin, return on capital employed and return on assets. It shows company efficientlygenerates return on capital, assets and sales. The market value ratios such as earning pershare and dividend per share show a rising trend. However, market value per share recordedat the beginning of the financial year of Nike has declined compared to last year.The company has good and consistent current ratio which proves that current assets aresufficiently enough to pay its liabilities. The asset management of the company is alsoefficient which evident from its consistent receivables and fixed assets turnover ratio. Thedeclining inventory turnover shows that company has achieved low production cost over its3

Valuation Report: Nikeinventory. However, Nike’s management rely too much on debt which is evident from itsdebt to equity ratio which is above 0.7 in 2014 and 2016. Though, financial debt which hasinterest cost is low compared to total liabilities.Question 2The corporate debt rating of Nike is AA- which is given by Standard and Poor’s. It showsvery low chances of company defaulting on its debt. Nike is an international brand because ofwhich its management has been able to achieve consistent returns to pay of its debt withoutany major concerns. The financial debt and operating debt levered by payables and debtorshave different cost associated. The financial debt is high in cost due to interest which is paidon such debt. However, the operating debt has low cost and it is used to run operations almostfree of cost. Thus, two types of debt have different risk associated. Given the company’sconsistent returns over time, it is completely justifiable to maintain high debt-equity ratio.4

Valuation Report: NikeQuestion 3The free cash flow of any cash generating business unit is obtained by subtracting capitalexpenditure from operating cash flows. Nike, Inc.’s free cash flow is calculated as followsCash Generated from Operations = $3096 millionMaintenance Capital Expenditure = $1143 millionFree Cash Flow = $3096 - $1143 = $1953 millionThe return on equity (RoE) is the ratio of net income of a firm to its shareholders’ equity. Tomake the calculation realistic, the average of both the variables is calculated and then the RoEvalue is derived. The company’s figures from 2016 annual report are as follows:Average20162015Net Income ($ million)3,5173,7603,273Shareholders' Equity ($million)12,48312,25812,707RoE (%)28.17Table 1: Return on EquityThe return on equity of 28.17 % is assumed to be the sustainable growth rate and it is used toproject cash flows over next five years.20162017E2018E2019E2020E2021EFree Cash Flow ($1953250332084112527067555