Fundamentals of Corporate Finance 3rd Edition - Ch. 10 Question 8: a,b,c,d 8. Co
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Question
Fundamentals of Corporate Finance 3rd Edition - Ch. 10 Question 8: a,b,c,d
8. Consider the valuation of Nike given in Example 10.1.
a. Suppose you believe Nike's initial revenuse 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?
b. 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?
c. 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?
d. What range of stock prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously?
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Explanation / Answer
Answer:
Cost of Capital 11.00% Year 2005 2006 2007 2008 2009 2010 2011 FCF Forecast ($millions) 1 Sales 518.00 564.62 609.79 652.47 691.62 726.20 755.25 2 growth vs. prior year 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3 EBIT 9.00% of sales 50.8 54.9 58.7 62.2 65.4 68.0 4 Less: Income Tax 37.00% of EBIT (18.8) (20.3) (21.7) (23.0) (24.2) (25.1) 5 Less: Net Investment 8.00% of sales (3.7) (3.6) (3.4) (3.1) (2.8) (2.3) 6 Less: Increase in NWC 10.00% of sales (4.7) (4.5) (4.3) (3.9) (3.5) (2.9) 7 Free Cash Flow 23.62 26.44 29.31 32.17 34.95 37.59 8 Terminal Value 558.54 9 PV of Free Cash Flows 424.83 10 Value of Cash 100.00 11 Value of Debt 3.00 12 Number of Shares 21 13 Share price 24.85 a. If Initial Revenue Growth Rate can vary between 4% and 11%, the stock price can vary between 22.86 and 25.70 b. If EBIT Margin can vary between 7% and 10%, the stock price can vary between 19.59 and 27.48 c. If Weighted Average Cost of Capital can vary between 10% and 12%, stock price can vary between 22.24 and 28.34 d. If all three of the above can vary, the stock price can vary between 16.54 and 32.62 Initial Revenue Growth Rate EBIT Margin Weighted Average Cost of Capital Base Case Stock Price 24.85 Base Case 24.85 Base Case 24.85 4.00% 22.86 7.00% 19.59 10.00% 28.34 4.18% 22.93 7.15% 19.98 10.10% 27.94 4.35% 22.99 7.30% 20.38 10.20% 27.55 4.53% 23.06 7.45% 20.77 10.30% 27.17 4.70% 23.13 7.60% 21.17 10.40% 26.81 4.88% 23.19 7.75% 21.56 10.50% 26.46 5.05% 23.26 7.90% 21.95 10.60% 26.12 5.23% 23.33 8.05% 22.35 10.70% 25.79 5.40% 23.40 8.20% 22.74 10.80% 25.46 5.58% 23.47 8.35% 23.14 10.90% 25.15 5.75% 23.53 8.50% 23.53 11.00% 24.85 5.93% 23.60 8.65% 23.93 11.10% 24.55 6.10% 23.67 8.80% 24.32 11.20% 24.27 6.28% 23.74 8.95% 24.72 11.30% 23.99 6.45% 23.81 9.10% 25.11 11.40% 23.72 6.63% 23.88 9.25% 25.51 11.50% 23.46 6.80% 23.95 9.40% 25.90 11.60% 23.20 6.98% 24.02 9.55% 26.30 11.70% 22.95 7.15% 24.09 9.70% 26.69 11.80% 22.70 7.33% 24.16 9.85% 27.09 11.90% 22.47 7.50% 24.23 10.00% 27.48 12.00% 22.24 7.68% 24.30 7.85% 24.37 8.03% 24.45 8.20% 24.52 8.38% 24.59 8.55% 24.66 8.73% 24.73 8.90% 24.81 9.08% 24.88 9.25% 24.95 9.43% 25.03 9.60% 25.10 9.78% 25.18 9.95% 25.25 10.13% 25.32 10.30% 25.40 10.48% 25.47 10.65% 25.55 10.83% 25.63 11.00% 25.70 Worst case scenario: Initial Revenue Growth is 4%, initial EBIT margin is 7%, and initial WACC is 12%: Cost of Capital 12.00% Kenneth Cole Productions Year 2005 2006 2007 2008 2009 2010 2011 FCF Forecast ($millions) 1 Sales 518.00 538.72 560.27 582.68 605.99 630.23 655.44 2 growth vs. prior year 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 3 EBIT 7.00% of sales 37.7 39.2 40.8 42.4 44.1 45.9 4 Less: Income Tax 37.00% of EBIT (14.0) (14.5) (15.1) (15.7) (16.3) (17.0) 5 Less: Net Investment 8.00% of sales (1.7) (1.7) (1.8) (1.9) (1.9) (2.0) 6 Less: Increase in NWC 10.00% of sales (2.1) (2.2) (2.2) (2.3) (2.4) (2.5) 7 Free Cash Flow 20.03 20.83 21.66 22.53 23.43 24.37 8 Terminal Value 316.77 9 PV of Free Cash Flows 250.35 10 Value of Cash 100.00 11 Value of Debt 3.00 12 Number of Shares 21 13 Share price 16.54 Best Case Scenario: Initial Revenue Growth is 11%, initial EBIT margin is 10%, and iniitial WACC is 10%: Cost of Capital 10.00% Kenneth Cole Productions Year 2005 2006 2007 2008 2009 2010 2011 FCF Forecast ($millions) 1 Sales 518.00 574.98 630.18 681.85 728.22 767.54 798.24 2 growth vs. prior year 11.00% 9.60% 8.20% 6.80% 5.40% 4.00% 3 EBIT 10.00% of sales 57.5 63.0 68.2 72.8 76.8 79.8 4 Less: Income Tax 37.00% of EBIT (21.3) (23.3) (25.2) (26.9) (28.4) (29.5) 5 Less: Net Investment 8.00% of sales (4.6) (4.4) (4.1) (3.7) (3.1) (2.5) 6 Less: Increase in NWC 10.00% of sales (5.7) (5.5) (5.2) (4.6) (3.9) (3.1) 8 Free Cash Flow 25.97 29.77 33.66 37.53 41.28 44.76 9 Terminal Value 775.89 10 PV of Free Cash Flows 588.00 11 Value of Cash 100.00 12 Value of Debt 3.00 13 Number of Shares 21 14 Share price 32.62Related Questions
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