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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 May 31, May 31, 2019 2018 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 $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 66 (78) 4,801 Income before income taxes Income tax expense 772 4,325 2,392 $1,933 Net income $4,029 NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $ millions Current assets Cash and equivalents $4,466 $4,249 Short-term investments 197 996 Accounts receivable, net 3,498 5,261 Inventories Prepaid expenses and other current assets 4,272 5,622 1,968 16,525 4,744 283 Total current assets 1,130 15,134 4,454 Property, plant and equipment, net Identifiable intangible assets, net Goodwill 285 154 154 Deferred income taxes and other assets 2,011 2,509 $23,717 $22,536 Total assets Current liabilities $6 $6 9 336 2,612 5,010 2,279 3,269 150 229 7,866 3,464 3,347 6,040 3,468 3,216 Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred come 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 B1,253 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) 3,517 1,643 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: $ 7,856 NNO: $ (1,184) 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: $ X 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 896 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 final answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal (millions) 2019 2020 2021 2022 Period Sales X $ x S * $ X $ NOPAT X NOA 2023 $ X X X X X X x 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. Note: Round your final answer to two decimal places (for example, round $15.555 to $15.56). Stock price per share: $ 0 X e. Nike's stock closed at $86,70 on July 23, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? Stock price is overvalued Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Nike Inc. NIKE INC. Consolidated Income Statements May 31, May 31, 2019 2018 For Year Ended ($ 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 $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 66 (78) 4,801 Income before income taxes Income tax expense 772 4,325 2,392 $1,933 Net income $4,029 NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $ millions Current assets Cash and equivalents $4,466 $4,249 Short-term investments 197 996 Accounts receivable, net 3,498 5,261 Inventories Prepaid expenses and other current assets 4,272 5,622 1,968 16,525 4,744 283 Total current assets 1,130 15,134 4,454 Property, plant and equipment, net Identifiable intangible assets, net Goodwill 285 154 154 Deferred income taxes and other assets 2,011 2,509 $23,717 $22,536 Total assets Current liabilities $6 $6 9 336 2,612 5,010 2,279 3,269 150 229 7,866 3,464 3,347 6,040 3,468 3,216 Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred come 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 B1,253 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) 3,517 1,643 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: $ 7,856 NNO: $ (1,184) 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: $ X 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 896 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 final answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal (millions) 2019 2020 2021 2022 Period Sales X $ x S * $ X $ NOPAT X NOA 2023 $ X X X X X X x 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. Note: Round your final answer to two decimal places (for example, round $15.555 to $15.56). Stock price per share: $ 0 X 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? Stock price is overvalued
