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FIN 321-Midterm Exam - Quesrion 1

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Consider the valuation of Nike given in Example 10.1, in Chapter 10;a. Suppose you believe Nike?s initial revenue growth rate will be between 7% and 11% (with growth always slowing linearly to 5% by year 2015). What range of share 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 share prices for Nike 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 share prices for Nike stock is consistent with these forecasts?;Nike;Cost of Capital;Year 2009 2010 2011 # ## ### 2015;FCF Forecast ($millions);1 Sales;2 growth vs. prior year;3 EBIT of sales;4 Less: Income Tax of EBIT;5 Plus: Depreciation;6 Less: Capital Expenditures;7 Less: Increase in NWC of? sales;8 Free Cash Flow;9 Terminal Value;10 PV of Free Cash Flows;11 Value of Cash;12 Value of Debt;13 Number of Shares;14 Share price;a. If Initial Revenue Growth Rate can vary between 7 and 11%, the stock price can vary between;and;b. If Initial Revenue EBIT Margin can vary between 9 and 11%, the stock price can vary between;and;c. If Weighted Average Cost of Capital can vary between 9.5 and 12%, stock price can vary between;and;d. Suppose that in January 2006,Nike had EPS of $3.51 and a book value of equity of $18.92 per share.;EPS;Book value of equity;a. Using the average P/E multiple in Table 10.1, estimate Nike?s;share price.;Price per share;b. What range of share prices do you estimate based on the highest and lowest P/E multiples in Table 10.1?;Range based on highest to lowest;High;Low;c. Using the average price to book value multiple in Table 10.1, estimate Nike?s share price.;Price per share;d. What range of share prices do you estimate based on the highest and lowest price to book value multiples in Table 10.1?;Range based on highest to lowest;High;Low;Suppose that in May 2010, Nike had sales of $19,176 million, EBITDA of $2,809 million, excess cash of $3,500 million, $437 million of debt, and 485.7 million shares outstanding.;Sales;EBITDA;Cash;Debt;Shares outstanding;a. Using the average enterprise value to sales multiple in Table 10.1, estimate Nike?s share price.;Price per share;b. What range of share prices do you estimate based on the highest and lowest enterprise value to sales multiples in Table 10.1?;Range based on highest to lowest;High;Low;c. Using the average enterprise value to EBITDA multiple in Table 10.1, estimate Nike's share price.;Price per share;d. What range of share prices do you estimate based on the highest and lowest enterprise value to EBITDA multiples in Table 10.1?;Range based on highest to lowest;High;Low;Table 10-1;Stock Prices and Multiples for the Footwear Industry, January 2006;Name Market Capitalization ($ millions) Enterprise Value ($ millions) P/E Price/Book Enterprise Value/Sales Enterprise value/EBITDA;Adidas AG 8,950 8,554 21.9 2.34 0.82 #;Puma AG 3,680 2,984 17.91 2.92 1.21 #;Deckers Outdoor Corp. 1,760 1,400 14.63 3.59 1.68 7;Skechers U.S.A. 1,730 1,420 17.11 2.2 0.89 8;Wolverine World Wide 1,460 1,380 18.72 3.08 1.22 9;Volcom, Inc. 531 455 21.21 2.37 1.62 #;Weyco Group 281 252 20.24 1.74 1.11 #;LaCrosse Footweara 118 99 15.14 1.95 0.67 7;R.G. Barry Corp. 114 79 11.11 1.96 0.63 5;Rock Shoes & Boots 45 89 25.96 0.56 0.38 5;Average 18.393 2.27 1.023 9;Maximum 41% 58% 64% #;Minimum -40% -75% -63% #;FIN 321-Midterm Exam - Quesrion 1;You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant?s report on your desk, and complains, ?We owe these consultants $1 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion.? You open the report and find the following estimates (in millions of dollars);Project Year;1 2 ? 9 10;Sales revenue 30,000 30,000 30,000 30,000;? Cost of good sold 18,000 18,000 18,000 18,000;= Gross profit 12,000 12,000 12,000 12,000;? General, sales, and;administrative expenses 2,000 2,000 2,000 2,000;? Depreciation 2,500 2,500 2,500 2,500;= Net operating income 7,500 7,500 7,500 7,500;? Income tax 2,625 2,625 2,625 2,625;= Net income 4,875 4,875 4,875 4,875;All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $4.875 million per year for ten years, the project is worth $48.75 million. You think back to your halcyon days in finance class and realize there is more work to be done!;First, you note that the consultants have not factored in the fact that the project will require $10 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $2 million of selling, general and administrative expenses to the project, but you know that $1 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earnings are not the right thing to focus on!;a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed project?;Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10;Cost of machine;Change in net working capital;Sales revenue;Minus cost of goods sold;Equals gross profit;Minus General, sales and administrative expense;Plus overhead that would have occurred anyway;Minus Depreciation;Equals net operating income;Minus income tax;Equals Net income;Plus depreciation;Cost of machine plus change in net working capital;Equals cash flow

 

Paper#79743 | Written in 18-Jul-2015

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