Flow to equity
Use the following information for Nike, Inc, and define the cost of equity using the Capital Asset Pricing Model.
After tax interest cost = 6.0%
Beta = 1.2
Beginning Book Value of Equity = $15 billion
Current stock price = $106 per share
Dividends (current year) = $1.48 per share per year
Dividend growth rate = 5%
Earnings per Share = $3.24/share
Equity Rist Premium = 7.5%
Market Cap = $164.3 billion
Net Debt to Capital = 20%
NOPAT Margin = 8%
Risk Free Rate = 4.4%
Sales / Beginning Long-term assets = 20
Sales / Beginning Net Operating Working Capital = 10
3a. Following the assumptions of our Kroger Model, compute the impact of $10,000 of additional sales next year at Nike on Nike’s free cash flow to equity next year. Be clear to indicate a direction as well as an amount (i.e., “+$5,000” or “-$1,000”, not just “6000”. Round to the nearest $1. Show your computations. (10 points)
| Effect on free cash flow to equity: | Computations: |
3b. Assuming that the $1 increase in sales lasts “forever”, but that the additional investment is only necessary one time, compute the impact of the $1 of additional sales on Nike’s current valuation. Again, be sure to indicate a direction as well as an amount. Show your computations. (5 points)
| Effect on valuation: | Computations: |
