Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Nike Inc. NIKE INC. Consolidated Income Statements For Year Ended ($ millions) Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total selling and administrative expense Interest expense (income), net Other (income) expense, net Income before income taxes May 31, May 31, 2019 2018 $39,117 $36,397 21,643 20,441 17,474 15,956 3,753 3,577 8,949 7,934 12,702 11,511 49 54 (78) 66 4,801 4,325 772 2,392 $4,029 $1,933 Income tax expense Net income NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $ millions Current assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Identifiable intangible assets, net Goodwill Deferred income taxes and other assets $4,466 $4,249 197 996 4,272 3,498 5,622 5,261 1,968 1,130 16,525 15,134 4,744 4,454 283 285 154 154 2,011 2,509 $23,717 $22,536 Total assets $6 $6 9 336 2,279 3,269 150 2,612 5,010 229 7,866 3,464 3,347 6,040 3,468 3,216 Current liabilities Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Commitments and contingencies (Note 18) Shareholders' equity Common stock at stated value: Class A convertible-315 and 329 shares outstanding Class B,1,253 and 1,272 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 3 3 7,163 6,384 231 (92) 1,643 3,517 9,040 9,812 $23,717 $22,536 Required a. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for 2019. The company's NNO is negative because cash exceeds debt. NOA: $ NNO: S b. Compute net operating profit after tax (NOPAT) for 2019 assuming a federal and state statutory tax rate of 22%. Note: Round your answer to the nearest whole dollar, NOPAT: $ c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5, to forecast sales, NOPAT, and NOA for 2020 through 2023 using the following assumptions. Sales growth 846 Net operating profit margin (NOPM) 2019 ratios rounded to three decimal places Net operating asset turnover (NOAT), year-end 2019 ratios rounded to three decimal places Forecast the terminal period value assuming a 2% terminal period growth and using the NOPM and NOAT assumptions above. Note: Round your answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal (5 millions) 2019 2020 2021 2022 2023 Period Sales NOPAT NOA 5 $ $ d. Estimate the value of a share of Nike's common stock using the residual operating income (ROPI) model as of May 31, 2019; assume a discount rate (WACC) of 6.8% and common shares outstanding of 1,682 million Stock price per share: $ e. Nike's stock closed at $86.70 on July 23, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Nike Inc. NIKE INC. Consolidated Income Statements For Year Ended ($ millions) Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total selling and administrative expense Interest expense (income), net Other (income) expense, net Income before income taxes May 31, May 31, 2019 2018 $39,117 $36,397 21,643 20,441 17,474 15,956 3,753 3,577 8,949 7,934 12,702 11,511 49 54 (78) 66 4,801 4,325 772 2,392 $4,029 $1,933 Income tax expense Net income NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $ millions Current assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Identifiable intangible assets, net Goodwill Deferred income taxes and other assets $4,466 $4,249 197 996 4,272 3,498 5,622 5,261 1,968 1,130 16,525 15,134 4,744 4,454 283 285 154 154 2,011 2,509 $23,717 $22,536 Total assets $6 $6 9 336 2,279 3,269 150 2,612 5,010 229 7,866 3,464 3,347 6,040 3,468 3,216 Current liabilities Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Commitments and contingencies (Note 18) Shareholders' equity Common stock at stated value: Class A convertible-315 and 329 shares outstanding Class B,1,253 and 1,272 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 3 3 7,163 6,384 231 (92) 1,643 3,517 9,040 9,812 $23,717 $22,536 Required a. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for 2019. The company's NNO is negative because cash exceeds debt. NOA: $ NNO: S b. Compute net operating profit after tax (NOPAT) for 2019 assuming a federal and state statutory tax rate of 22%. Note: Round your answer to the nearest whole dollar, NOPAT: $ c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5, to forecast sales, NOPAT, and NOA for 2020 through 2023 using the following assumptions. Sales growth 846 Net operating profit margin (NOPM) 2019 ratios rounded to three decimal places Net operating asset turnover (NOAT), year-end 2019 ratios rounded to three decimal places Forecast the terminal period value assuming a 2% terminal period growth and using the NOPM and NOAT assumptions above. Note: Round your answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal (5 millions) 2019 2020 2021 2022 2023 Period Sales NOPAT NOA 5 $ $ d. Estimate the value of a share of Nike's common stock using the residual operating income (ROPI) model as of May 31, 2019; assume a discount rate (WACC) of 6.8% and common shares outstanding of 1,682 million Stock price per share: $ e. Nike's stock closed at $86.70 on July 23, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price