ACCT3013

Exercise W8E2: uncovering expected returns from 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 residual

earnings (RE) is expected to grow at 4% annual rate after 2015.

Required

1. The market price of a share of Nikes equity as of the end of fiscal year 2010 was $74.

Find the expected return on Nikes shares as implied by the market price.