FIN 322

Lab Assignment 11

Skills Applied
 Absolute and Relative Cell References
 SUMPRODUCT(), SQRT(),
 Scenario Manager
 Relabeling a Scenario Summary

Instructions
File Setup:
1. Open the Lab 11 Assignment STUDENT file. The financial data from Lab 2 has already been loaded into this
file. Rename the file as “LastName_Lab 11”.

General Format (using the Financial Model Format Basics):

2. Format values as noted unless otherwise stated:
a. accounting format with $ and one decimal place for dollar values (pay attention as some Excel functions
automatically return currency format!)
b. percentage format with one decimal for percentages – italicize if calculated value only
c. date format as MM/DD/YYYY for all dates
d. number format with comma separator and one decimal for all other numbers
3. Use font/cell fill color as required to represent hard-coded numbers, input values (assumptions), calculated
values, or direct cell references to other worksheets/workbooks.
4. Maintain border format and shading as provided unless otherwise stated.

Business and Financial Risk:

5. Cell reference to the most recent year’s total assets, earnings before taxes (EBT), taxes, and interest expense
on the “FinStms” worksheet. Calculate the value of total debt as we have this semester, using the most
recent year’s data from the “FinStms” worksheet.
6. Calculate the tax rate and the interest rate on debt.
7. Cell reference to the most recent year’s EBIT on the “FinStms” worksheet, adjusting this value for the
unusual items (extraordinary expenses) as we have this semester.
8. To define the capital structure alternatives:
a. All Equity – Calculate the total dollar value of equity given the total assets and the assumed level of debt
under this alternative.
b. Debt & Equity – Cell reference to the total debt in the model inputs. Calculate the total dollar value of
equity given the total assets and the total debt. NOTE: This value will not match the value on the
financial statements for total equity.
9. Calculate the net income and performance measures assuming the all equity model or the debt & equity
model as defined in the capital structure table.
10. Using the Scenario Manager function in Excel (Data Ribbon – What If Analysis – Scenario Manager), run a
best case scenario with a revised EBIT of $5,000 million and a worst case scenario with a revised EBIT of
$300 million. Report the output values contained in cells C32:D35.

Revised 11/30/2020
11. Revise the scenario summary output table so that it lists names for the input and output variables as shown
below:

12. Using the probabilities assigned to the base, best, and worst case scenarios along with the ROE values from
the Scenario Summary (cell reference to these values), calculate the expected ROE (E(ROE)) and the
standard deviation of the ROE using the SUMPRODUCT() and SQRT() functions as required.
13. Determine the measure of financial risk for Nike under the given assumptions.
14. Format all values as required.

Optimal Capital Structure

As noted in both the lecture and at the top of this worksheet, calculating an optimal capital structure is an
academic exercise that is not used in the “real” world. It does help to explain why firms will use, but limit,
debt financing within their capital structures.
15. Cell reference to your calculated values for EBIT and the tax rate from the “Business and Financial Risk”
worksheet. Calculate the expected free cash flow (FCF) for Nike assuming zero growth, i.e. that Nike’s net
investment in operating capital is $0.
16. Cell reference to the shares outstanding and the value of short-term investments for the most recent year
on the “FinStms” worksheet. The remainder of the model inputs are provided for you.
17. Using the data in the Model Inputs table and the varying levels of debt financing in row 21, complete rows
23 through 33. Remember to use Hamada’s equation when calculating the beta under the differing levels of
debt financing.
18. Detail the process of recapitalization (using debt to repurchase shares of stock) for Nike when moving from
an all equity position to 10 percent debt financing. Assume that Nike will maintain $439.0 million in short-
term investments after the repurchase is completed, i.e. only debt will be used to repurchase shares.
19. Calculate the net income and earnings per share (EPS) under each of the capital structure options.
20. Format all values as required.
THINK ABOUT IT: Compare the optimal capital structure as determined by the WACC, value of the firm, and
the price per share to that determined by the earnings per share. Do the two methods provide the same
recommended optimal capital structure?

Save your file and submit it through the Blackboard assignment by the due date and time as listed.

Revised 11/30/2020