# Nike Inc. (NKE) | Present Value of Free Cash Flow to the Firm (FCFF)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

## Intrinsic Stock Value (Valuation Summery)

Nike Inc., free cash flow to the firm (FCFF) forecast

USD \$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.05%
01 FCFF0 1,326
1 FCFF1 1,515  = 1,326  × (1 + 14.26%) 1,364
2 FCFF2 1,709  = 1,515  × (1 + 12.86%) 1,386
3 FCFF3 1,905  = 1,709  × (1 + 11.45%) 1,391
4 FCFF4 2,097  = 1,905  × (1 + 10.05%) 1,379
5 FCFF5 2,278  = 2,097  × (1 + 8.65%) 1,349
5 Terminal value (TV5) 103,009  = 2,278  × (1 + 8.65%) ÷ (11.05% – 8.65%) 60,994
Intrinsic value of 's capital 67,862
Less: Notes payable (fair value) 108
Less: Long-term debt, including current portion (fair value) 283
Intrinsic value of 's common stock 67,471

Intrinsic value of 's common stock (per share) \$74.00
Current share price \$65.32

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

## Weighted Average Cost of Capital (WACC)

Nike Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 59,555  0.99 11.10%
Notes payable (fair value) 108  0.00 6.30% = 8.36% × (1 – 24.70%)
Long-term debt, including current portion (fair value) 283  0.00 3.33% = 4.42% × (1 – 24.70%)

1 USD \$ in millions

2 Required rate of return on debt is after tax (estimated effective tax rate is 24.70%)

WACC = 11.05%

## FCFF Growth Rate (g)

### FCFF growth rate (g) implied by PRAT model

Nike Inc., PRAT model

Average May 31, 2012 May 31, 2011 May 31, 2010 May 31, 2009 May 31, 2008 May 31, 2007
Selected Financial Data (USD \$ in millions)
Income taxes   760  711  610  470  620  708
Net income   2,223  2,133  1,907  1,487  1,883  1,492
Tax rate1   25.48% 25.00% 24.24% 24.02% 24.77% 32.18%

Interest expense   33  34  36  40  39  50
Interest expense, after tax2   25  26  27  30  29  34
Add: Dividends on common stock   639  569  515  475  433  357
Interest expense (after tax) and dividends   664  595  542  505  462  391

EBIT(1 – Tax Rate)3   2,248  2,159  1,934  1,517  1,912  1,526

Notes payable   108  187  139  343  178  101
Current portion of long-term debt   49  200  32  31
Long-term debt, excluding current portion   228  276  446  437  441  410
Total shareholders' equity   10,381  9,843  9,754  8,693  7,825  7,025
Total capital   10,766  10,506  10,346  9,505  8,450  7,567
Ratios
Retention rate (RR)4   0.70 0.72 0.72 0.67 0.76 0.74
Return on invested capital (ROIC)5   20.88% 20.55% 18.70% 15.96% 22.63% 20.17%
Averages
RR 0.72
ROIC 19.81%

Growth rate of FCFF (g)6 14.26%

2012 Calculations

1 Tax rate = 100 × Income taxes ÷ (Net income + Income taxes)
= 100 × 760 ÷ (2,223 + 760) = 25.48%

2 Interest expense, after tax = Interest expense × (1 – Tax rate)
= 33 × (1 – 25.48%) = 25

3 EBIT(1 – Tax Rate) = Net income + Interest expense, after tax
= 2,223 + 25 = 2,248

4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [2,248 – 664] ÷ 2,248 = 0.70

5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × 2,248 ÷ 10,766 = 20.88%

6 g = RR × ROIC
= 0.72 × 19.81% = 14.26%

### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (59,946 × 11.05% – 1,326) ÷ (59,946 + 1,326) = 8.65%

where:
Total capital, fair value0 = current fair value of 's debt and equity (USD \$ in millions)
FCFF0 = last year 's free cash flow to the firm (USD \$ in millions)
WACC = weighted average cost of 's capital

### FCFF growth rate (g) forecast

Nike Inc., H-model

Year Value gt
1 g1 14.26%
2 g2 12.86%
3 g3 11.45%
4 g4 10.05%
5 and thereafter g5 8.65%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.26% + (8.65% – 14.26%) × (2 – 1) ÷ (5 – 1) = 12.86%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.26% + (8.65% – 14.26%) × (3 – 1) ÷ (5 – 1) = 11.45%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.26% + (8.65% – 14.26%) × (4 – 1) ÷ (5 – 1) = 10.05%