With the Nikes financial statements for 2004, an analyst prepares a forecast in order to value Nikes shares. With a thorough knowledge of the business, its customers, and the outlook for athletic and fashion footwear, he or she first prepares a sales forecast. Then, understanding the production process and the components of costs of goods sold, the forecasts how much gross margin will be earned from sales. Adding forecasts of expenses rations particularly the all-important driver for Nike, the advertising-to-sales ratio, he finalizes his pro forma income statements with a forecast off operating income. In summary, he or she arrives at the following forecasts:

1. Sales for 2005 will be $13,500 million, followed by 14,600 million for 2006. For 2007-2009, sales are expected to grow at a rate of 9 percent per year.
2. The gross margin of 42.9 percent in 2004 is expected to increase to 44.5% in 2005 and 2006 as benefits of off-shore manufacturing are reaped, but decline to 42 percent in 2007 and subsequently to 41 percent as labor costs increase and more costly, high-end shoes are brought to market
3. Advertising, standing at 11.25% of sales in 2004, will increase to 11.6 percent of sales to maintain the ambitious sales growth. The recruitment of visible sports starts to promote the brand will also add to advertising costs.
4. Other before-tax expenses are expected to be 19.6 % of sales, the same percentage of sales as in 2004
5. The effective tax rate on operating income with be 34.6%
6. No unusual items are expected.

With all this information,

1) Knowing that 2004 sales were equal to 12,253 million, put together the 2004 income statement and prepare the pro-forma income statements for years 2005-2009

2) Calculate Nikes profit margins and comment on its expected trend. What happens if Nike announces actual results for 2005 showing operating income, after-tax, of $1,209 million? How your forecasts will be affected for such development? No further calculations are needed, just a general discussion.