ACCT3013

Exercise W8E1: analyst earnings forecasts and residual income valuation (RIV)

As of the end of fiscal year 2010, the consensus analyst earnings per share forecasts for Nike Inc.

for the next two years (2011 and 2012) are $4.29 and $4.78, respectively. In its 2010 annual

report, Nike reported earnings per share of $3.93, book value per share of $20.15, and dividends

per share of $1.06.

Assume that from 2013 to 2015, Nikes earnings per share is expected to grow from its 2012

base at 11% rate. The dividend payout ratio is expected to remain at its 2010 level. The surveyed

cost of equity capital for Nike as of 2010 is 10%.

Required

1. Assuming the residual earnings (RE) to grow at 4% annual rate after 2015, perform

residual income valuation for Nike as of the fiscal year end of 2010.

2. Assuming the residual earnings to remain at its 2015 level (i.e. no growth in RE after

2015), perform residual income valuation for Nike as of the fiscal year end of 2010.