Mid Exam FSA

Group 2: Gloria, Vena, Hansen, Melyani, Juariyah

1. Answer:
If an investor expects to earn 10% on her investment in a stock, then earnings/price should be
10% and price/earnings should be 10. Any return above this would be considered "high" and any
return below it "low." So a P/E of 33 (an E/P yield of 3.03%) would be considered high and a
P/E of 8 (an E/P yield of 12.5%) would be considered low. But we would have to also consider
how accounting rules measure earnings: If accounting measures result in lower earnings (through
high depreciation charges or the expensing of research and development expenditure, for
example) then a normal P/E ratio might be higher than 10. And one also has to consider growth:
If earnings are expected to be higher in the future than current earnings, the E/P ratio should be
lower than this 10% benchmark (and the corresponding P/E higher). In early 2012, the S&P 500
P/E ratio stood at 14.4.
2. Answer:
2013 2014 2015 2016

Cash flow from 730 932 1,234 1,592

operation
Cash 673 932 1,352 1,745
investment
Free cash flow 57 91 118 153

3. Answer:
a.
2005 2006 2007 2008 2009
Cash flow 2,014 2,057 2,095 2,107
operation
Cash investment 300 380 442 470
in operation
Free cash flow 1,714 1,677 1,653 1,637
Rate of discount 1.09 1,1881 1,2950 1,4116
Present value of 1.572 1,411 1,276 1,160
FCF
Total of PV to 5,419
2009
PV of CV 12,885
Entreprise value 18,304
Net debt 6,192
 Velue of equity 12,112

The value per share on 368 shares = $32.82

CV (no. growth) = 1,367 / 0.09
= 18,189
PV of CV = 18,189 / 1.4116
= 12,885

b. CV = (1,637 x 1.03) / (1.09 – 1.03)

= $ 28,101.83
The present value of the continuing value is $28,101.83 / 1.4116 = $19,907.79

Total of PV to 2009 5,419

Continuing value 28,102
PV of CV 19,908
Enterprise value 25,327
Net debt 6,192
Equity value 19,136

Value per share on 369 million shares = $51.86

4. Answer:

  2010 A 2011 E 2012 E 2013 E 2014 E 2015 E

EPS 3.93 4.29 4.78 5.31 5.89 6.54
DPS 1.06 1.16 1.29 1.43 1.59 1.77
BPS 20.15 23.28 26.77 30.65 34.95 39.72
             
ROCE   21.3% 20.5% 19.8% 19.2% 18.7%
RE (9% charged)   2.477 2.685 2.901 3.132 3.395
Discount rate (1.09)ᵗ   1.090 1.188 1.295 1.412 1.539
PV of RE   2.272 2.260 2.240 2.218 2.206
Total PV to 2015 11.20          
CV           70.62
PV of CV 45.89          
 Value per Share 77.24          

The continuing value based on the GDP growth rate:

CV = 3.395 x 1.04 = 70.62
1.09 - 1.04

In this Nike valuation, we used the average historical GDP growth rate of 4% as the long-run
growth rate. In the long-run, we expect residual earnings for all firms to grow at the GDP growth
rate. Although the GDP growth rate may work well on average, it is probably not appropriate for
all firms. While we might expect all firms to grow at the GDP rate in the long-run, Nike may be
able to sustain a higher growth at the GDP rate.