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# Nike Inc. (NKE)

## Present Value of Free Cash Flow to Equity (FCFE)

Difficulty: Intermediate

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 equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

Nike Inc., free cash flow to equity (FCFE) forecast

USD \$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at
01 FCFE0
1 FCFE1 = × (1 + )
2 FCFE2 = × (1 + )
3 FCFE3 = × (1 + )
4 FCFE4 = × (1 + )
5 FCFE5 = × (1 + )
5 Terminal value (TV5) = × (1 + ) ÷ ()
Intrinsic value of Nike Inc.’s common stock
Intrinsic value of Nike Inc.’s common stock (per share) \$
Current share price \$

Based on: 10-K (filing date: 2019-07-23).

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.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF Expected rate of return on market portfolio2 E(RM) Systematic risk (β) of Nike Inc.’s common stock βNKE Required rate of return on Nike Inc.’s common stock3 rNKE

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rNKE = RF + βNKE [E(RM) – RF]
= + []
=

### FCFE Growth Rate (g)

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

Nike Inc., PRAT model

Average May 31, 2019 May 31, 2018 May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014
Selected Financial Data (USD \$ in millions)
Dividends on common stock
Net income
Revenues
Total assets
Shareholders’ equity
Ratios
Retention rate1
Profit margin2
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin
Asset turnover
Financial leverage
Growth rate of FCFE (g)5

Based on: 10-K (filing date: 2019-07-23), 10-K (filing date: 2018-07-25), 10-K (filing date: 2017-07-20), 10-K (filing date: 2016-07-21), 10-K (filing date: 2015-07-23), 10-K (filing date: 2014-07-25).

2019 Calculations

1 Retention rate = (Net income – Dividends on common stock) ÷ Net income
= () ÷ =

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × ÷ =

3 Asset turnover = Revenues ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Shareholders’ equity
= ÷ =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × × × =

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × ( × ) ÷ ( + ) =

where:
Equity market value0 = current market value of Nike Inc.’s common stock (USD \$ in millions)
FCFE0 = last year Nike Inc.’s free cash flow to equity (USD \$ in millions)
r = required rate of return on Nike Inc.’s common stock

#### FCFE growth rate (g) forecast

Nike Inc., H-model

Year Value gt
1 g1
2 g2
3 g3
4 g4
5 and thereafter g5

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)
= + () × (2 – 1) ÷ (5 – 1) =

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= + () × (3 – 1) ÷ (5 – 1) =

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= + () × (4 – 1) ÷ (5 – 1) =