# Nike Inc. (NYSE:NKE)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

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 Summary)

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

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.89%
01 FCFF0 1,390
1 FCFF1 1,579  = 1,390  × (1 + 13.61%) 1,450
2 FCFF2 1,772  = 1,579  × (1 + 12.21%) 1,494
3 FCFF3 1,963  = 1,772  × (1 + 10.82%) 1,521
4 FCFF4 2,148  = 1,963  × (1 + 9.43%) 1,528
5 FCFF5 2,321  = 2,148  × (1 + 8.03%) 1,516
5 Terminal value (TV5) 292,807  = 2,321  × (1 + 8.03%) ÷ (8.89%8.03%) 191,277
Intrinsic value of Nike Inc.’s capital 198,786
Less: Short-term borrowings and long-term debt (fair value) 10,893
Intrinsic value of Nike Inc.’s common stock 187,893

Intrinsic value of Nike Inc.’s common stock (per share) \$120.45
Current share price \$105.41

Based on: 10-K (filing date: 2020-07-24).

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) 164,428  0.94 9.31%
Short-term borrowings and long-term debt (fair value) 10,893  0.06 2.49% = 2.98% × (1 – 16.45%)

Based on: 10-K (filing date: 2020-07-24).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,559,888,549 × \$105.41 = \$164,427,851,950.09

Short-term borrowings and long-term debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (20.20% + 16.10% + 8.30% + 13.20% + 18.70% + 22.20%) ÷ 6 = 16.45%

WACC = 8.89%

### FCFF Growth Rate (g)

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

Nike Inc., PRAT model

Average May 31, 2020 May 31, 2019 May 31, 2018 May 31, 2017 May 31, 2016 May 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense 151  131  124  86  31  34
Net income 2,539  4,029  1,933  4,240  3,760  3,273

Effective income tax rate (EITR)1 20.20% 16.10% 8.30% 13.20% 18.70% 22.20%

Interest expense, after tax2 120  110  114  75  25  26
Add: Dividends on common stock 1,491  1,360  1,265  1,159  1,053  931
Interest expense (after tax) and dividends 1,611  1,470  1,379  1,234  1,078  957

EBIT(1 – EITR)3 2,659  4,139  2,047  4,315  3,785  3,299

Current portion of long-term debt 44  107
Notes payable 248  336  325  74
Long-term debt, excluding current portion 9,406  3,464  3,468  3,471  2,010  1,079
Shareholders’ equity 8,055  9,040  9,812  12,407  12,258  12,707
Total capital 17,712  12,519  13,622  16,209  14,313  13,967
Financial Ratios
Retention rate (RR)4 0.39 0.64 0.33 0.71 0.72 0.71
Return on invested capital (ROIC)5 15.02% 33.06% 15.03% 26.62% 26.45% 23.62%
Averages
RR 0.58
ROIC 23.30%

FCFF growth rate (g)6 13.61%

Based on: 10-K (filing date: 2020-07-24), 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).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 151 × (1 – 20.20%) = 120

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 2,539 + 120 = 2,659

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,6591,611] ÷ 2,659 = 0.39

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,659 ÷ 17,712 = 15.02%

6 g = RR × ROIC
= 0.58 × 23.30% = 13.61%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (175,321 × 8.89%1,390) ÷ (175,321 + 1,390) = 8.03%

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

#### FCFF growth rate (g) forecast

Nike Inc., H-model

Year Value gt
1 g1 13.61%
2 g2 12.21%
3 g3 10.82%
4 g4 9.43%
5 and thereafter g5 8.03%

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)
= 13.61% + (8.03%13.61%) × (2 – 1) ÷ (5 – 1) = 12.21%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.61% + (8.03%13.61%) × (3 – 1) ÷ (5 – 1) = 10.82%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.61% + (8.03%13.61%) × (4 – 1) ÷ (5 – 1) = 9.43%