In this Weekly Assignment, you are asked to apply the free cash flow valuation model to calculate the intrinsic price of Nike. On Canvas you can find the annual report by Nike for year-end May 31, 2015. In page 110 of that annual report you can find the Statements of Cash Flows for years 2013, 2014, and 2015. In addition, you are provided the following information and assumptions: Nike's applicable tax rate is 35%. Nike's interest receipts for fiscal years 2013, 2014 & 2015 are $6, $8 and $12 million, respectively. Nike's cost of capital is 7.5%. Nike's free cash flow is expected to grow at 4% per annum for from 2015 to 2016 and continue to grow at that rate up to 2020. Nike's free cash flow will grow at 2% on average per annum from 2020 to 2021 onwards. The total value of liabilities can be obtained from the balance sheet. At year-end 2015, Nike had 855,351,589 common shares outstanding. Required: You are required to prepare an Excel spreadsheet, similar to those provided in Week 3 reading material, to perform the following tasks: 1. Calculate the free cash flows for fiscal years 2013, 2014 and 2015. 2. Then, calculate the intrinsic equity value per share of Nike Inc. as of May. 31, 2015 using the discounted cash flow valuation method. NIKE, Inc. Consolidated Statements of Cash Flows Year Ended May 31, 2014 2015 2013 03 3,273 $ 2,693 $ 2,472 518 606 (113) 191 43 424 (11) 177 68 56 438 20 174 64 66 (124) (216) (621) (144) 1,237 4,680 (298) (505) (210) 525 3,013 142 (219) (28) 27 3,032 (5,386) 3,932 1,126 (4,133) 1,663 1,330 (4,936) 3,655 2,216 (150) (963) 3 (880) 3 (in millions) Cash provided by operations: Net income Income charges (credits) not affecting cash: Depreciation Deferred income taxes Stock-based compensation (Note 11) Amortization and other Net foreign currency adjustments Net gain on divestitures Changes in certain working capital components and other assets and liabilities: (Increase) decrease in accounts receivable (Increase) in inventories (Increase) in prepaid expenses and other current assets Increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Investments in reverse repurchase agreements Additions to property, plant and equipment Disposals of property, plant and equipment Proceeds from divestitures (Increase) in other assets, net of other liabilities Cash used by investing activities Cash used by financing activities: Net proceeds from long-term debt issuance Long-term debt payments, including current portion (Decrease) increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchase of common stock Dividends - common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net increase (decrease) in cash and equivalents Cash and equivalents, beginning of year CASH AND EQUIVALENTS, END OF YEAR Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of capitalized interest Income taxes Non-cash additions to property, plant and equipment Dividends declared and not paid The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 1 Il (598) 14 786 (2) (940) (175) (1,207) 986 (49) 10 (63) (19) 514 218 (2,534) (899) (2,790) (83) 1,632 2,220 3,852 $ (60) 75 (17) 383 132 (2,628) (799) (2,914) (9) (1,117) 3,337 2,220 $ 313 72 (1,674) (703) (1,045) 36 1,083 2,254 3,337 $ 02 53 S 1,262 206 240 53 $ 856 167 209 20 702 137 188 PART II NIKE, Inc. Consolidated Statements of Shareholders' Equity 2 1 1 11 Common Stock Capital in Accumulated Class A Excess Other Class B of Stated Comprehensive Retained (In millions, except per share data) Shares Amount Shares Amount Value Income Earnings Total Balance at May 31, 2012 180 3 $ 4,641 $ 149 $ 5,526 $ 10,319 Stock options exercised 10 322 322 Conversion to Class B Common Stock 2 Repurchase of Class B Common Stock (34) (10) (1,647) (1,657) Dividends on common stock ($0.81 per share) (727) (727) Issuance of shares to employees 2 65 65 Stock-based compensation (Note 11) 174 174 Forfeiture of shares from employees (8) (4) (12) Net income 2,472 2,472 Other comprehensive income (loss) 125 125 Balance at May 31, 2013 178 $ 716 $ 3 $ 5,184 $ 274 $ 5,620 $ 11,081 Stock options exercised 445 445 Repurchase of Class B Common Stock (37) (2,617) (2,628) Dividends on common stock ($0.93 per share) (821) (821) Issuance of shares to employees 2 78 78 Stock-based compensation (Note 11) 177 177 Forfeiture of shares from employees (8) (4) (12) Net income 2,693 2,693 Other comprehensive income (loss) (189) (189) Balance at May 31, 2014 178 $ 692 S 3 $ 5,865 $ 85 $ 4,871 $ 10,824 Stock options exercised 14 639 639 Repurchase of Class B Common Stock (29) (9) (2,525) (2,534) Dividends on common stock ($1.08 per share) (931) (931) Issuance of shares to employees 2 92 92 Stock-based compensation (Note 11) 191 191 Forfeiture of shares from employees (5) (3) Net income 3,273 3.273 Other comprehensive income (loss) 1,161 1,161 Balance at May 31, 2015 178 $ 679 S 3 $ 6,773 $ 1,246 $ 4,685 $ 12,707 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. _ FORM 10-K - PART II NIKE, Inc. Consolidated Balance Sheets May 31, 2015 2014 S 3,852 $ 2,072 3,358 4,337 389 1,968 15,976 3,011 281 131 2,201 21,600 $ 2,220 2,922 3,434 3,947 355 818 13,696 2,834 282 131 1,651 18,594 S S In millions) ASSETS Current assets: Cash and equivalents (Note 6) Short-term investments (Note 6) Accounts receivable, net (Note 1) Inventories (Notes 1 and 2) Deferred income taxes (Note 9) Prepaid expenses and other current assets (Notes 6 and 17) Total current assets Property, plant and equipment, net (Note 3) Identifiable intangible assets, net (Note 4) Goodwill (Note 4) Deferred income taxes and other assets (Notes 6, 9 and 17) TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 8) Notes payable (Note 7) Accounts payable (Note 7) Accrued liabilities (Notes 5, 6 and 17) Income taxes payable (Note 9) Total current liabilities Long-term debt (Note 8) Deferred income taxes and other liabilities (Notes 6, 9, 13 and 17) Commitments and contingencies (Note 16) Redeemable preferred stock (Note 10) Shareholders' equity: Common stock at stated value (Note 11): Class A convertible 178 and 178 shares outstanding Class B - 679 and 692 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (Note 14) Retained earnings Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 107 $ 74 2,131 3,951 71 6,334 1,079 1,480 7 167 1,930 2,491 432 5,027 1,199 1,544 FORM 10-K 3 6,773 1,246 4,685 12,707 21,600 $ 3 5,865 85 4,871 10,824 18,594 S PART 11 NIKE, Inc. Consolidated Statements of Comprehensive Income Year Ended May 31, 2015 2014 3,273 $ 2,693 $ 2013 2,472 (20) 1,188 (32) (161) 4 38 12 (8) (in millions) Net income Other comprehensive income (loss), net of tax: Change in net foreign currency translation adjustment) Change in net gains (losses) on cash flow hedges/2) Change in net gains (losses) on otheria) Change in release of cumulative translation loss related to Umbro/4) Total other comprehensive income (loss), net of tax TOTAL COMPREHENSIVE INCOME (1) Net of tax benefit (expense) of $0 million, So milion and $(13) million, respectively. (2) Net of tax benefit (expense) of $(31) million, $18 million and $(22) million, respectively. (3) Net of tax benefit (expense) of $0 milion, So million and $1 million, respectively. (4) Net of tax benefit (expense) of $0 million, 50 million and $47 milior, respectively. The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 83 125 1,161 4,434 $ (189) 2,504 $ $ 2,597 PART II NIKE, Inc. Consolidated Statements of Income 2015 Year Ended May 31, 2014 2013 $ 30,601 $ 16,534 14,067 3,213 6,679 9,892 28 (58) 4,205 932 3,273 In millions, except per share data) Income from continuing operations: Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total selling and administrative expense Interest expense (income), net (Notes 6, 7 and 8) Other (income) expense, net (Note 17) Income before income taxes Income tax expense (Note 9 NET INCOME FROM CONTINUING OPERATIONS NET INCOME FROM DISCONTINUED OPERATIONS NET INCOME Earnings per common share from continuing operations: Basic (Notes 1 and 12) Diluted (Notes 1 and 12) Earnings per common share from discontinued operations: Basic (Notes 1 and 12) Diluted (Notes 1 and 12) Dividends declared per common share The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 27,799 $ 15,353 12,446 3,031 5,735 8,766 33 103 3,544 851 2,693 25,313 14,279 11,034 2,745 5,051 7,796 (3) (15) 3,256 805 2,451 21 2,472 $ 3,273 $ 2,693 S $ $ 3.80 $ 3.70 $ 3.05 $ 2.97 S 2.74 2.68 $ $ $ II 044 0.02 0.02 0.81 FORM 10-K 1.08 0.93 In this Weekly Assignment, you are asked to apply the free cash flow valuation model to calculate the intrinsic price of Nike. On Canvas you can find the annual report by Nike for year-end May 31, 2015. In page 110 of that annual report you can find the Statements of Cash Flows for years 2013, 2014, and 2015. In addition, you are provided the following information and assumptions: Nike's applicable tax rate is 35%. Nike's interest receipts for fiscal years 2013, 2014 & 2015 are $6, $8 and $12 million, respectively. Nike's cost of capital is 7.5%. Nike's free cash flow is expected to grow at 4% per annum for from 2015 to 2016 and continue to grow at that rate up to 2020. Nike's free cash flow will grow at 2% on average per annum from 2020 to 2021 onwards. The total value of liabilities can be obtained from the balance sheet. At year-end 2015, Nike had 855,351,589 common shares outstanding. Required: You are required to prepare an Excel spreadsheet, similar to those provided in Week 3 reading material, to perform the following tasks: 1. Calculate the free cash flows for fiscal years 2013, 2014 and 2015. 2. Then, calculate the intrinsic equity value per share of Nike Inc. as of May. 31, 2015 using the discounted cash flow valuation method. NIKE, Inc. Consolidated Statements of Cash Flows Year Ended May 31, 2014 2015 2013 03 3,273 $ 2,693 $ 2,472 518 606 (113) 191 43 424 (11) 177 68 56 438 20 174 64 66 (124) (216) (621) (144) 1,237 4,680 (298) (505) (210) 525 3,013 142 (219) (28) 27 3,032 (5,386) 3,932 1,126 (4,133) 1,663 1,330 (4,936) 3,655 2,216 (150) (963) 3 (880) 3 (in millions) Cash provided by operations: Net income Income charges (credits) not affecting cash: Depreciation Deferred income taxes Stock-based compensation (Note 11) Amortization and other Net foreign currency adjustments Net gain on divestitures Changes in certain working capital components and other assets and liabilities: (Increase) decrease in accounts receivable (Increase) in inventories (Increase) in prepaid expenses and other current assets Increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Investments in reverse repurchase agreements Additions to property, plant and equipment Disposals of property, plant and equipment Proceeds from divestitures (Increase) in other assets, net of other liabilities Cash used by investing activities Cash used by financing activities: Net proceeds from long-term debt issuance Long-term debt payments, including current portion (Decrease) increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchase of common stock Dividends - common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net increase (decrease) in cash and equivalents Cash and equivalents, beginning of year CASH AND EQUIVALENTS, END OF YEAR Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of capitalized interest Income taxes Non-cash additions to property, plant and equipment Dividends declared and not paid The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 1 Il (598) 14 786 (2) (940) (175) (1,207) 986 (49) 10 (63) (19) 514 218 (2,534) (899) (2,790) (83) 1,632 2,220 3,852 $ (60) 75 (17) 383 132 (2,628) (799) (2,914) (9) (1,117) 3,337 2,220 $ 313 72 (1,674) (703) (1,045) 36 1,083 2,254 3,337 $ 02 53 S 1,262 206 240 53 $ 856 167 209 20 702 137 188 PART II NIKE, Inc. Consolidated Statements of Shareholders' Equity 2 1 1 11 Common Stock Capital in Accumulated Class A Excess Other Class B of Stated Comprehensive Retained (In millions, except per share data) Shares Amount Shares Amount Value Income Earnings Total Balance at May 31, 2012 180 3 $ 4,641 $ 149 $ 5,526 $ 10,319 Stock options exercised 10 322 322 Conversion to Class B Common Stock 2 Repurchase of Class B Common Stock (34) (10) (1,647) (1,657) Dividends on common stock ($0.81 per share) (727) (727) Issuance of shares to employees 2 65 65 Stock-based compensation (Note 11) 174 174 Forfeiture of shares from employees (8) (4) (12) Net income 2,472 2,472 Other comprehensive income (loss) 125 125 Balance at May 31, 2013 178 $ 716 $ 3 $ 5,184 $ 274 $ 5,620 $ 11,081 Stock options exercised 445 445 Repurchase of Class B Common Stock (37) (2,617) (2,628) Dividends on common stock ($0.93 per share) (821) (821) Issuance of shares to employees 2 78 78 Stock-based compensation (Note 11) 177 177 Forfeiture of shares from employees (8) (4) (12) Net income 2,693 2,693 Other comprehensive income (loss) (189) (189) Balance at May 31, 2014 178 $ 692 S 3 $ 5,865 $ 85 $ 4,871 $ 10,824 Stock options exercised 14 639 639 Repurchase of Class B Common Stock (29) (9) (2,525) (2,534) Dividends on common stock ($1.08 per share) (931) (931) Issuance of shares to employees 2 92 92 Stock-based compensation (Note 11) 191 191 Forfeiture of shares from employees (5) (3) Net income 3,273 3.273 Other comprehensive income (loss) 1,161 1,161 Balance at May 31, 2015 178 $ 679 S 3 $ 6,773 $ 1,246 $ 4,685 $ 12,707 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. _ FORM 10-K - PART II NIKE, Inc. Consolidated Balance Sheets May 31, 2015 2014 S 3,852 $ 2,072 3,358 4,337 389 1,968 15,976 3,011 281 131 2,201 21,600 $ 2,220 2,922 3,434 3,947 355 818 13,696 2,834 282 131 1,651 18,594 S S In millions) ASSETS Current assets: Cash and equivalents (Note 6) Short-term investments (Note 6) Accounts receivable, net (Note 1) Inventories (Notes 1 and 2) Deferred income taxes (Note 9) Prepaid expenses and other current assets (Notes 6 and 17) Total current assets Property, plant and equipment, net (Note 3) Identifiable intangible assets, net (Note 4) Goodwill (Note 4) Deferred income taxes and other assets (Notes 6, 9 and 17) TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 8) Notes payable (Note 7) Accounts payable (Note 7) Accrued liabilities (Notes 5, 6 and 17) Income taxes payable (Note 9) Total current liabilities Long-term debt (Note 8) Deferred income taxes and other liabilities (Notes 6, 9, 13 and 17) Commitments and contingencies (Note 16) Redeemable preferred stock (Note 10) Shareholders' equity: Common stock at stated value (Note 11): Class A convertible 178 and 178 shares outstanding Class B - 679 and 692 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (Note 14) Retained earnings Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 107 $ 74 2,131 3,951 71 6,334 1,079 1,480 7 167 1,930 2,491 432 5,027 1,199 1,544 FORM 10-K 3 6,773 1,246 4,685 12,707 21,600 $ 3 5,865 85 4,871 10,824 18,594 S PART 11 NIKE, Inc. Consolidated Statements of Comprehensive Income Year Ended May 31, 2015 2014 3,273 $ 2,693 $ 2013 2,472 (20) 1,188 (32) (161) 4 38 12 (8) (in millions) Net income Other comprehensive income (loss), net of tax: Change in net foreign currency translation adjustment) Change in net gains (losses) on cash flow hedges/2) Change in net gains (losses) on otheria) Change in release of cumulative translation loss related to Umbro/4) Total other comprehensive income (loss), net of tax TOTAL COMPREHENSIVE INCOME (1) Net of tax benefit (expense) of $0 million, So milion and $(13) million, respectively. (2) Net of tax benefit (expense) of $(31) million, $18 million and $(22) million, respectively. (3) Net of tax benefit (expense) of $0 milion, So million and $1 million, respectively. (4) Net of tax benefit (expense) of $0 million, 50 million and $47 milior, respectively. The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 83 125 1,161 4,434 $ (189) 2,504 $ $ 2,597 PART II NIKE, Inc. Consolidated Statements of Income 2015 Year Ended May 31, 2014 2013 $ 30,601 $ 16,534 14,067 3,213 6,679 9,892 28 (58) 4,205 932 3,273 In millions, except per share data) Income from continuing operations: Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Total selling and administrative expense Interest expense (income), net (Notes 6, 7 and 8) Other (income) expense, net (Note 17) Income before income taxes Income tax expense (Note 9 NET INCOME FROM CONTINUING OPERATIONS NET INCOME FROM DISCONTINUED OPERATIONS NET INCOME Earnings per common share from continuing operations: Basic (Notes 1 and 12) Diluted (Notes 1 and 12) Earnings per common share from discontinued operations: Basic (Notes 1 and 12) Diluted (Notes 1 and 12) Dividends declared per common share The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 27,799 $ 15,353 12,446 3,031 5,735 8,766 33 103 3,544 851 2,693 25,313 14,279 11,034 2,745 5,051 7,796 (3) (15) 3,256 805 2,451 21 2,472 $ 3,273 $ 2,693 S $ $ 3.80 $ 3.70 $ 3.05 $ 2.97 S 2.74 2.68 $ $ $ II 044 0.02 0.02 0.81 FORM 10-K 1.08 0.93
