E5.13. Converting Analysts' Forecasts to a Valuation: Nike, Inc. (Medium) Nike reported book value per share of $15.93 at the end of its 2008 fiscal year. Analysts were forecasting earnings of $3.90 per share for 2009 and $4.45 for 2010, and were also forecasting a five-year growth rate in EPS of 13 percent per year. Prepare a five-year pro forma of earnings based on these forecasts and convert the forecasts to a valuation with the added forecast that residual earnings will grow at the GDP growth rate of 4 percent per year after 2013. Use a required return of 10 percent in your calculations. Table 5.2 in this chapter will help you. Nike traded at $60 per share at the time. Based on your calculations, do you think Nike is reasonably priced? What does your analysis tell you about the long-run growth rate that the market is forecasting for Nike? DPS TABLE 5.2 Converting Analysts' Forecasts to a Valuation: Nike, Inc. (NKE) Analysts forecast EPS two years ahead ($4.29 for 2011 and $4.78 for 2012) and also forecast a five- year EPS growth rate of 11 percent. Forecasts for 20132015 apply this consensus EPS growth rate to the 2012 estimate. Dividends per share (DPS) are set at the 2010 payout rate of 27 percent of earnings. Required rate of return is 10 percent. Years labeled A are actual numbers, years labeled E are expected numbers. 2010 A 2011 E 2012 E 2013 E 2014 E 2015 E EPS 3.93 4.294.78 5.31 5.896.54 1.06 1.16 1 .29 1.43 1.59 1.77. BPS 20.15 23.28 2 6.77 30.65 34.95 39.72 ROCE 21.3% 20.5% 19.8% 19.2% 18.7% RE (9% charge) 2.477 2.685 2.901 3.132 3.395 Discount rate (1.09) 1.090 1.188 1.295 1.412 1.539 Present value of RE 2.272 2.260 2.240 2.218 2.206 Total PV to 2015 11.20 Continuing value (CV) 70.62 Present value 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