ASSIGNMENT : 6

AN INVESTMENT ANALYSIS CASE STUDY: NIKE

CASES IN CORPORATE FINANCE

 CASE STUDY
WORKING: 1 Investment & Depreciation

Yea DDB Straight Line Depreciation Total

Investment
r Depreciation Depreciation Charged Cap. Exp Depreciation Depreciation
1,00
0
0              
1,00
1
0              
50
2
0              
1,5
3  
00 300 150 300     300
1,2
4  
00 240 133 240     240
9
5  
60 192 120 192     192
7
6  
68 154 110 154 1126   154
6
7  
14 123 102 123   189 312
4
8  
92 98 98 98   189 287
3
9  
93 79 98 98   189 287
3
10  
15 63 105 105   189 294
2
11  
52 50 126 126   189 315
2
12  
01 40 201 201   189 390

WORKING: 2 Revenue and Expenses

Yea Market Revenue Revenue Nike's G & A Additiona New dept.

r Revenue of Nike C.G.S growth rate Exp. lG&A Total G & A
75,00
0
0       2,000    
78,75
1
0       2,100    
82,68
2
8       2,205    
86,82
3
2 1736 1337 0 2,315 50 166
 91,16
4
3 2279 1755 0.313 2,431 66 187
95,72
5
1 2872 2211 0.260 2,553 83 210
100,50
6
7 3518 2709 0.225 2,680 101 235
105,53
7
3 4221 3250 0.200 2,814 122 262
110,80
8
9 4986 3840 0.181 2,955 144 291
116,35
9
0 5817 4479 0.167 3,103 168 323
122,16
10
7 6108 4703 0.050 3,258 176 339
128,27
11
5 6414 4939 0.050 3,421 185 356
134,68
12
9 6734 5186 0.050 3,592 194 374

WORKING: 3 Advertisement Expense

ADDITIONAL ADVERTISEMENT
Year
ADVERTISEMENT EXPENSE (7%)
0 1000 -
1 1040 -
2 1082 -
3 1125 79
4 1170 82
5 1217 85
6 1265 89
7 1316 92
8 1369 96
9 1423 100
10 1480 104
11 1539 108
12 1601 112
 WORKING: 4 Working Capital

Accounts Accounts Working Change In Working

Year Receivable Inventory Payable Capital Capital
0          
1          
2         120
3 87 134 100 120 38
4 114 175 132 158 41
5 144 221 166 199 45
6 176 271 203 244 49
7 211 325 244 292 53
8 249 384 288 345 58
9 291 448 336 403 20
10 305 470 353 423 21
11 321 494 370 444 22
12 337 519 389 466  

WORKING: 5 Weights For Debt And Equity:

1- Market Value of Equity = $ 106.79* 368.94 million = $ 39,399 million

2- Interest bearing Debt = $ 387 + $ 921+ $ 12,567 = $ 13,875 million

PV Of Lease Commitments

Years Op Lease PVIF PV of OL

0 390 1 390
1 374 0.9615 360
2 310 0.9246 287
3 253 0.8890 225
4 198 0.8548 169
5 174 0.8219 143
Beyond 5 13,375 0.8219 10,993
    TOTAL 12,567

3- Equity % = 39,399 / (39,399 + 13,875) = 74 %

 4- Debt % = 13,875 / (39,399 + 13,875) = 26 %

Cost Of Capital:

1- Cost of equity:

Risk free Rate = 3%

Equity Risk Premium = 6%*.5+ 7.05%*0.2+9.00%*0.2+8.63%*0.1 = 7.07%
Levered beta = 1.14*(1+(1-.4)( .0582)) = 1.1786
Cost of Equity = 3% + 1.1786(7.07%) = 11.34%

2- Cost of debt:

Default Spread based upon rating = 1.0%

Pre-tax cost of debt = 3% + 1.0% = 4%
After-tax cost of debt = 4% (1-.4) = 2.4%

3- Cost of capital for apparel project:

Cost of Capital = 0 .1134 (0.74) + 0.024 (.26) = 9%