Nike’s residual income

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

4a. Compute Nike’s residual income (for the whole firm, not per share)?  Show your computations. (5 points)

Residual Income:

Computations:

4b. Why might we expect, theoretically, that abnormal or residual income will trend towards zero in the long run?  Be brief (one sentence should be sufficient) (5 points)

4c. Why, in practice, does this not actually occur (residual income tends to be positive in the long run)?  Be brief (one sentence should be sufficient) (5 points)