Page 1 INPUTS FOR VALUATION Current Inputs Enter the current

| June 7, 2016

Question
Page 1

INPUTS FOR VALUATION
Current Inputs
Enter the current revenues of the firm =
Enter current capital invested in the firm =
Enter the current depreciation =
Enter the current capital expenditures for the firm =
Enter the change in Working Capital in last year =
Enter beginning shareholder’s equity
Enter the value of current debt outstanding =
Enter the number of shares outstanding =

$12,406
$10,000 (Book Value of Equity + Book Value of Debt)
$233
$298 (you might try an average of the prior 3 years)
$115
(current assets – current liabilities for the most recent year) – (current assets – current liabilities for the prior year)
$20,000
$10,000
1,500.00

High Growth Period

Your Inputs

Enter the growth rate in revenues for the next 5 years =

25.00%

What will all operating expenses be as a % of revenues in the fifth year? 70.00% (Operating expenses include depreciation: This is equal to (1-Pre-tax Operating Margin))
How much debt do you plan to use in financing investments?
Enter the growth rate in capital expenditures & depreciation

50% (you might try an average of the prior 3 years)
25.00% (you might try an average of the prior 3 years)

Enter working capital as a percent of revenues

7.50% (current assets – current liabilities) / Revenues

Enter the tax rate that you have on corporate income

36.00% (you might try an average of the prior 3 years)

What beta do you want to use to calculate cost of equity =

1.25

Enter the current long term bond rate =

6.50% <- the 1928-2014 average bond yield

Enter the market risk premium you want to use =

5.50% <- the 1928-2014 average risk premium (stocks – bonds)

Enter your cost of borrowing money =

8.50% <- the 1928-2014 average bond yield

Stable Period
Enter the growth rate in revenues =

6.00%

Enter operating expenses as a % of revenues in stable period =
Enter capital expenditures as a percent of depreciation in this period

75.00%
200.00% (you might try an average of the prior 3 years)

How much debt do you plan to use in financing investments?

5.00% (you might try an average of the prior 3 years)

Enter interest rate of debt in stable period =

7.50% <- the 1928-2014 average bond yield

What beta do you want to use in the stable period =

1.10
ESTIMATED CASHFLOWS

Base

Revenues

$12,406

2

3

4

5

6

7

8

9

10

25.00%

25.00%

25.00%

25.00%

21.20%

17.40%

13.60%

9.80%

6.00%

25.00%

Growth in Deprec’n

1
25.00%

Growth in Revenue

25.00%

25.00%

25.00%

25.00%

21.20%

17.40%

13.60%

9.80%

6.00%

$15,508

$19,384

$24,230

$30,288

$37,860

$45,886

$53,871

$61,197

$67,194

$71,226

Operating Expenses
% of Revenues

70.00%

70.00%

70.00%

70.00%

70.00%

70.00%

71.00%

72.00%

73.00%

74.00%

75.00%

– $ Operating Expenses

$8,684

$10,855

$13,569

$16,961

$21,202

$26,502

$32,579

$38,787

$44,674

$49,724

$53,420
$17,807

EBIT

$3,722

$4,652

$5,815

$7,269

$9,086

$11,358

$13,307

$15,084

$16,523

$17,471

Tax Rate

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

36.00%

$22,382

$25,359

$29,081

$33,733

$39,549

$46,818

$55,334

$64,988

$75,563

$86,744

$98,140

$2,382

$2,977

$3,722

$4,652

$5,815

$7,269

$8,517

$9,654

$10,575

$11,181

$11,396

+ Depreciation

$233

$291

$364

$455

$569

$711

$862

$1,012

$1,149

$1,262

$1,338

– Capital Expenditures

$298

$373

$466

$582

$728

$909

$1,263

$1,616

$1,969

$2,322

$2,675

– Change in WC

$115

$233

$291

$363

$454

$568

$602

$599

$549

$450

$302

$2,202

$2,664

$3,329

$4,162

$5,202

$6,503

$7,514

$8,451

$9,206

$9,671

$9,756

Ending equity
EBIT (1-t)

= FCFF
Terminal Value (in ’05)

$167,813
COSTS OF EQUITY AND CAPITAL
1

2

3

4

5

6

7

8

9

10

Cost of Equity

13.38%

13.38%

13.38%

13.38%

13.38%

13.21%

13.05%

12.88%

12.72%

12.55%

Proportion of Equity

50.00%

50.00%

50.00%

50.00%

50.00%

59.00%

68.00%

77.00%

86.00%

95.00%

5.44%

5.44%

5.44%

5.44%

5.44%

5.31%

5.18%

5.06%

4.93%

4.80%

50.00%

50.00%

50.00%

50.00%

50.00%

41.00%

32.00%

23.00%

14.00%

5.00%

9.41%

9.41%

9.41%

9.41%

9.41%

9.97%

10.53%

11.08%

11.62%

12.16%

Cumulative WACC

109.41%

119.70%

130.96%

143.28%

156.76%

172.39%

190.54%

211.66%

236.26%

265.00%

Cumulative Cost of Equity

After-tax Cost of Debt
Proportion of Debt
Cost of Capital

113.38%

128.54%

145.73%

165.22%

187.32%

212.07%

239.73%

270.61%

305.02%

343.29%

Present Value

$2,435

$2,782

$3,178

$3,631

$4,148

$4,359

$4,435

$4,349

$4,093

$67,008

Value of Firm

$100,417

FIRM VALUATION

– Value of Debt

$10,000

Value of Equity

$90,417

Value of Equity per Share

$60.28

1995
Value of Firm by year
$ Value of Debt

1996

1997

1998

1999

2000

2001

2002

2003

2004

$100,417

$107,200

$113,956

$120,514

$126,649

$132,061

$137,716

$143,766

$150,491

$158,314

$50,208.61

$53,600

$56,978

$60,257

$63,325

$54,145

$44,069

$33,066

$21,069

$7,916

Page 1

DAE Valuation

EBIT (1-t)
– WACC (CI)
Abnormal Earnings
Terminal AE
PV
PV of AE
+ Capital Invested
+ PV of Chg Capital in Yr 10
= Firm Value

Indicated Price per share

Base
$2,382

5
$7,269
$1,580
$5,690

6
$8,517
$1,661
$6,855

7
$9,654
$1,771
$7,882

8
$10,575
$1,904
$8,671

9
$11,181
$2,054
$9,128

$1,499
$1,957
$2,459
$3,013
$3,629
$83,800
$10,000
$3,651 This reconciles the assumptions on stable growth, ROC and Capital Invested

$3,977

$4,137

$4,097

$3,863

Cumulated Cost of Equity

2
$3,722
$1,379
$2,342

3
$4,652
$1,432
$3,220

4
$5,815
$1,498
$4,318

10
Terminal Year
$11,396
$12,080
$2,216
$3,636
$9,180
$8,444
$137,016
$55,169

$97,450
$64.97

Cost of Equity
ROC
Capital Invested
Calculation of Capital Invested
Initial
+ Net Cap Ex
+ Chg in WC
Ending

1
$2,977
$1,338
$1,640

13.38%
29.77%
$10,000

$10,000

$10,000

13.38%
36.09%
$10,314

13.38%
43.45%
$10,706

13.38%
51.94%
$11,197

13.38%
61.55%
$11,810

13.21%
67.72%
$12,576

13.05%
71.09%
$13,579

12.88%
71.54%
$14,782

12.72%
69.23%
$16,151

12.55%
64.53%
$17,661

$10,000
$81
$233
$10,314

$10,314
$102
$291
$10,706

$10,706
$127
$363
$11,197

$11,197
$159
$454
$11,810

$11,810
$198
$568
$12,576

$12,576
$401
$602
$13,579

$13,579
$604
$599
$14,782

$14,782
$820
$549
$16,151

$16,151
$1,060
$450
$17,661

$17,661
$1,338
$302
$19,301

109.41%

119.70%

130.96%

143.28%

156.76%

172.39%

190.54%

211.66%

236.26%

265.00%

Page 2

0.00%
41.69%
$28,975 (Adjusted to reflect terminal ROC)

DAROE
1
2
3
4
5
6
7
8
9
10
Terminal Year
Forecast ROE
0.13302861 0.146762194 0.159974529 0.172390131 0.183802011 0.181907476 0.174459731 0.162720074 0.147971435 0.131376997
Cost of Equity
13.38%
13.38%
13.38%
13.38%
13.38%
13.21%
13.05%
12.88%
12.72%
12.55%
Abnormal ROE
0.07%
1.30%
2.62%
3.86%
5.01%
4.98%
4.40%
3.39%
2.08%
0.59%
0.59%
Present Value of AROE
0.06%
1.01%
1.80%
2.34%
2.67%
2.37%
1.87%
1.29%
0.71%
0.18%
1.44%
Total DAROE
115.60%
Beginning Equity
$20,000
$23,120
Firm Value
Indicated value per share $15.41

Buffett Valuation Worksheet (January/February 1998, Computerized Investing, www.aaii.com)
Enter values into shaded cells
Date of Analysis: 12/31/1997
Current Stock Data
Company: Nike, Inc.
Ticker: NKE
Price: $48.25
EPS: $2.77
DPS: $0.48
BVPS: $11.38
P/E: 17.4
Earnings Yield: 5.7%
Dividend Yield: 1.0%
P/BV: 4.2

Seven Year Averages
Return on Equity: 22.8%
Payout Ratio: 15.9%
P/E Ratio-High: 18.4
P/E Ratio-Low: 9.5
P/E Ratio: 14.0
Sustainable Growth 19.2%
(ROE * (1 – Payout Ratio))

Gv’t Bond Yield: 6.0%

Historical Company Data
Year
Year 8
Year 7
Year 6
Year 5
Year 4
Year 3
Year 2
Year 1

EPS

0.80
0.94
1.07
1.18
0.99
1.36
1.88
2.68

DPS

0.09
0.13
0.15
0.19
0.20
0.24
0.29
0.38

BVPS
2.62
3.39
4.35
5.33
5.77
6.68
8.28
10.63

Price
High

8.70
11.98
18.94
22.56
22.31
19.13
35.19
64.00

P/E Ratio
High
3.20
10.9
6.00
12.7
8.78
17.7
13.75
19.1
10.78
22.5
11.56
14.1
17.19
18.7
31.75
23.9

Low

Low

4.0
6.4
8.2
11.7
10.9
8.5
9.1
11.8

ROE
30.5%
27.7%
24.6%
22.1%
17.2%
20.4%
22.7%
25.2%

EPS
DPS
BVPS
High Price Low Price
Annually Compounded Rates of Growth (7 year)
[(Year 1 / Year 8) ^ (1/7)] – 1
18.9%
22.8%
22.1%
33.0%
38.8%
Annually Compounded Rates of Growth (3 year)
[(Year 1 / Year 4) ^ (1/3)] – 1
39.4%
23.9%
22.6%
42.1%
43.3%

Projected Company Data Using Historical Earnings Growth Rate
Year
Current
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10

EPS
$2.77
3.29
3.91
4.65
5.53
6.57
7.81
9.28
11.03
13.11
15.58

DPS
0.44
0.52
0.62
0.74
0.88
1.05
1.24
1.48
1.76
2.09
2.48

15.58 Earnings after 10 years
13.29 Sum of dividends paid over 10 years
$217.43 Projected price (Average P/E * EPS)
$230.72 Total gain (Projected Price + Dividends)
16.9% Projected return using historical EPS growth rate
[(Total Gain / Current Price) ^ (1/10)] – 1

Projected Company Data Using Sustainable Growth Rate
Year
Current
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10

BVPS
$11.38
13.57
16.17
19.28
22.98
27.39
32.66
38.93
46.41
55.32
65.94

EPS
2.60
3.10
3.69
4.40
5.25
6.26
7.46
8.89
10.60
12.64
15.06

DPS
0.41
0.49
0.59
0.70
0.84
1.00
1.19
1.42
1.69
2.01
2.40

15.06 Earnings after 10 years (BVPS * ROE)
12.72 Sum of dividends paid over 10 years
$210.23 Projected price (Average P/E * EPS)
$222.96 Total gain (Projected Price + Dividends)
16.5% Projected return using sustainable growth rate
[(Total Gain / Current Price) ^ (1/10)] – 1

Payout
Ratio
11.3%
13.8%
14.0%
16.1%
20.2%
17.6%
15.4%
14.2%

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