NIKE CASE

As per 10-K SEC filing, Nike has issued redeemable preference shares, $1 par value which is redeemable at the option of NIAC or the Company at par value aggregating $0.3 million. A cumulative dividend of $0.10 per share is payable annually on May 31 and no dividends may be declared or paid on the common stock of the Company unless dividends on the Redeemable Preferred Stock have been declared and paid in full. As mentioned, market value should be used when calculating the value of the preferred shares. However, based on the characteristics of the preferred stock, the issued preference shares is in essence analogous to the debt issued by the company. Thus, in the absence of a publicly traded market for the preferred shares, the book value of the preference shares can be used when assessing Nike’s capital structure if the company has not experienced significant changes in its credit rating. Given that the book value of Nike’s preferred stock is negligible in the overall capital structure context, we shall ignore the preference shares as well.

Hence the weight of capital structure assigned to equity and debt is approximately 87% and 23% respectively.

2. Cost of equity

There are a variety of ways to calculate cost of equity, for instance using Capital Asset Pricing Model (CAPM), Dividend Discount Model, Earnings Capitalization ratio, Fama-French Model (FFM), the Pastor-Stambaugh Model (PSM), macroeconomic multifactor models and many others. In general, we do agree that Joanna’s approach of using CAPM to compute the cost of equity is appropriate. However, the approach of using only method to compute cost of equity might be biased or subject to modelling risks especially if the underlying assumptions turn out to be invalid. Accordingly, the cost of equity should be checked against other cost of equity computational methods and a simple average of the methods may be more desirable to eliminate the inherent risks and limitations (which will be discussed later) of adopting solely the CAPM model.

Moreover, the accuracy of the CAPM model is highly dependent on obtaining a suitable risk-free rate, firm’s beta and market risk premium.

The risk-free rate is the assumed interest rate that can be attained by investing in financial instruments with no default risk. Presently, US Treasuries are deemed as a common choice for US Dollars investments because the likelihood of the government defaulting is extremely low. Hence, we can accept Joanna’s use of 20 year U.S Treasury yields as the risk-free rate as Nike is an established multi-national company which should not have any going concern issue.

Beta of a stock describes the relation of the stock’s return with that of the financial market as a whole. A critique on Joanna’s computation obtaining the beta is the simple averaging of Nike Inc’s yearly beta from 1996 to 2000. We notice that Nike Inc’s beta has been declining consistently from 0.98 in 1996 to 0.83 in 2000 (Clarence, you can decide whether to put it here or at Steven’s part). In this respect, a simple average of the beta over the years is not appropriate without exact knowledge and understanding of the underlying reasons leading to the consistently-declining beta. The correct approach would be to perform a regression of Nike’s returns against the benchmark (or S&P 500 returns) over the 5 year period. In addition, the Joanna’s beta computation did not include a beta drift. Studies have shown that beta has the tendency to converge to 1 over time.

Equity risk premium is the excess return above the risk-free rate that investors require for holding equity securities. Joanna used the historical estimate of the risk premium for the period 1926 – 1999. The strength of using the historical estimates is its objectivity and simplicity. Furthermore, if investors are rational, then historical estimates will be unbiased. As the market premium appears to be countercyclical, that is, it is low during good times and high during bad times, choosing the long sample period from 1926 – 1999 is appropriate so as to reduce the effects on market return from the various stages in the business cycle.

Nonetheless, we do not agree that Joanna’s selection of geometric mean of the equity risk premium is suitable. Using the geometric mean assumes that the equity risk premium will be the same for each and every future time period which we know is not the case. There is considerable volatility in the year-by-year calculation of the equity risk premium and at times, the equity risk premium is even negative. The arithmetic average acknowledges the fact that the market returns vary over time and are preferred when estimating next period returns since they reproduce the proper probabilities and means of expected returns.

3. Cost of debt

Joanna used cost of debt of 4.3%, which she estimated using total interest expense for the year 2001 and dividing it by the company’s average debt balance between 2000 and 2001. This approximation is inaccurate as the interest expense line may have included expenses not directly related to the company’s debt. For example, it may include interest expense recognized under GAAP which may not truly reflect the interest amount to be paid if the firm were to borrow money, such as interest expense on pension fund.

A more accurate indication of the Nike’s cost of debt is the current market yield of Nike’s publicly traded debt. This is up to date as it is based on latest trade figures and shows the current return investors ask for lending money to Nike.

Exhibit 4 shows the following data on Nike’s publicly traded debt:

Coupon                6.75% paid semi-annually

Issued                 07/15/1996

Maturity                07/15/2021 (20 years left from 2001)

Current price        $95.60

Using Excel with the following inputs: nper = 40, pmt = $6.75/2, pv = -$95.60, fv = $100.  

The annual yield of the bond, cost of debt, kd = 3.584% x 2 = 7.167% 

As such, cost of debt to be used should be 7.167% instead of 4.3%. This is higher than the 20-year Treasury yield of 5.74%, reflecting the risk premium that the market attaches to Nike’s debt.

Joanna also noted that her estimated cost of debt of 4.3% is lower than the 20-year Treasury yields of 5.74% because part of Nike’s funding is raised through Japanese yen notes with rates between 2.0% to 4.3%. This justification on Nike’s cost of debt is incorrect because firstly, while part of the debt is raised in a lower-yielding foreign market, the other part is raised in the US market with much higher interest rates. As such it is prudent to be conservative and use the US debt yield.

Secondly, if Joanna decides to adopt the foreign market rate, a number of adjustments should be made to the rate to take into account risk premiums for market risks, currency risks, as well as geopolitical risks.

In calculating the cost of debt Joanna has used a tax rate of 38% (35% statutory tax rate + 3% state tax). The statutory tax rate has been consistent at 35%, while the state tax ranged between 2.5% and 3.5%. In the absence of more details which can help us to determine the right marginal state tax rate to use, we agree with Joanna’s approach in taking the mid-point at 3%, which results in the combined tax rate of 38%.

3. Available alternative/options

Beside the Capital Asset Pricing Model (CAPM), there are a number of alternatives available to calculate cost of equity:

1. Arbitrage Pricing Model (APM)/ Multi Factor Model

The APM is an extension of the CAPM method. The APM generalizes CAPM by accommodating multiple systemic risk factors using logic base, on the concept of ‘financial arbitrage’. The model does not spell out what these factors should be; instead researchers rely on extensive empirical testing of numerous macroeconomic and financial variables to find additional factors that might improve the explanatory power of CAPM. This relationship is shown below:

E(R) = Rf + Σj=1 βj (Rj- Rf)

Rf  is the risk-free rate of interest such as interest arising from government bonds

βj is the sensitivity of the factor risk premium to the expected excess market returns

Rj is the factor risk premium

One benefit of using APM is that it usually leads to greater explanatory power of real-world stock returns when compared to the CAPM. The disadvantage lies in the need to rely on numerous factor assumptions, which makes the accuracy of the model highly subjective.

1. By proxy: Use bond yield (risk free rate) + various premiums.

This technique is popular among some practitioners, most notably Warren Buffet. It uses empirical relation between the return on a company’s stock and its bond yield-to-maturity, adding a fixed risk premium to this yield. The relationship is shown below:

E(R) = bond yield + risk premium

So for example, a firm with a current bond Yield to Maturity of 7.1% will have an estimated cost of equity of 10.1% once a fixed 3% risk premium is added to the YTM. There is no theoretical reason for adding a 3% premium, it appears that this relation is just as good or better for many stocks that using a formal model such as the CAPM1. The benefit of this technique is that it is simple to use, with minimal assumptions needed.

2. Dividend discount model

The Dividend Discount Model (DDM) defines the cash flows received by investors as the dividends distributed. If the current share price of Nike Inc. has correctly reflected market expectations of future dividends to be received, DDM can be adopted to bootstrap the market-implied cost of equity.

3. Earnings capitalization ratio

The Earnings Capitalization Model (ECM) states that the cost of equity can be estimated as E1/P0, where E1 is the forecasted earnings for the upcoming year and P0 is the current share price.

In the following sections, we will discuss further the detailed analysis of Nike’s cost of equity using the CAPM, Dividend Discount Model, and the Earnings Capitalisation ratio. The advantages and disadvantages of each method will also be discussed.

4. Analysis of Cost of Equity

In the preceding sections, we have carried out a critique of Joanna’s calculations of the cost of debt, cost of equity and WACC. In addition, we have suggested an alternative method of computing the cost of debt which, in our opinion, is more reliable and robust.

In this section, we shall compute the cost of equity using the following methods and discuss the key advantages and disadvantages of each method:

1. Capital Asset Pricing Method
2. Dividend Discount Model
3. Earnings Capitalization Model

1. Capital Asset Pricing Model

Using the Capital Asset Pricing Model (CAPM), the cost of equity is essentially the expected return on a stock as explained by the following equation:

         where,        

E(Ri)         is the expected excess return on the stock

Rf         is the risk-free rate of interest such as interest arising from government bonds

βi         is the sensitivity of the expected excess stock returns to the expected excess market returns and known as beta

E(Rm)         is the expected excess return of the market

Prior to using CAPM method, we need to first determine an appropriate value for beta.

Estimating Beta

A critique on Joanna’s computation of the cost of equity is the simple averaging of Nike Inc’s beta from 1996 to 2000. We notice that Nike’s beta has been declining consistently from 0.98 in 1996 to 0.83 in 2000. In this respect, a simple average of the beta over the years is not appropriate without exact knowledge and understanding of the underlying reasons leading to the consistently-declining beta.

In our view, regressing the returns of Nike against those of S&P 500 to derive beta would be more appropriate. We carried out regression based on the daily percentage returns, weekly percentage returns and monthly percentage returns for the period 1 Jan 1996 to 30 Jun 2000 and the results of the regression are as follow:

Table 1 Results of Regression to Derive Beta

Of the three methodologies, regression by the monthly percentage returns provides the highest R2-value at 21.09%. However, this regression is based on just 54 data returns and we do not consider it to be adequate.

The R2-value of 9.77% using the daily percentage returns is too low for consideration of acceptance. Thus, the beta derived using the weekly percentage returns (based on 235 data points) is comparatively more appropriate though the R2-value is only 13.41%.

From the regression, we estimate the unadjusted beta to be 0.9059. For forecasting and valuation purpose, the concept of beta drift where it postulates the tendency for the beta to drift towards the market beta of 1 overtime is applicable.

The adjusted beta is derived using the following formula:

Adjusted Beta = [(2/3)*(unadjusted beta)] + [(1/3)*(market beta)]

Therefore, Nike Inc’s adjusted beta         = [(2/3)*(0.9059)] + [(1/3)*(1.00)]

                                                = 0.9370

We subsequently use this adjusted beta to compute Nike’s cost of equity by the CAPM method. After deriving beta, we can use the CAPM method to estimate the cost of equity.

Using the following parameters:

Rf                 = 5.74% (based on current yield of 20-year US Treasuries)

βi                 = 0.9370 (based on regression of Nike’s weekly percentage returns against  

                  corresponding weekly percentage returns of S&P 500)

E(Rm)         = 5.90% (based on geometric mean of historical equity risk premiums

               between 1926 and 1999)

Nike ’s cost of equity         = 5.74% + [(0.9370)*(5.90%)]

                                    = 11.27%

Advantages of CAPM

1. The CAPM model is easily understood and accounts for both systematic risk of the broad market and the stock itself.
2. The required parameters can easily be derived from market data.
3. The CAPM model captures the trade-off between risk and return i.e. higher returns can only be achieved at the price of higher risk.

Disadvantages of CAPM

1. The CAPM model is essentially a single-factor model using beta as an all-encompassing factor to describe the idiosyncratic risks of a stock. It is highly doubtful that beta is indeed such a powerful factor.
2. We assume that beta, as a correlation measure between the stock and the market, is static and consistent. This may not be true as the relationship between the stock and the market can be dynamic.
3. In deriving beta, we relied solely on the variances of returns on the stock and the market. Hence, we are saying that these variances are adequate measurement of risk. This may only be true if the returns on the stock and the market are normally distributed, which is hardly the case in reality.
4. The considerations of taxes and transaction costs are absent from the CAPM model.

2. Dividend Discount Model (DDM)

Shareholders’ investment today is worth the present value of the expected cash flows that are expected to receive in future. The Dividend Discount Model (DDM) defines the cash flows received by investors as the dividends distributed. If the current share price of Nike Inc. has correctly reflected market expectations of future dividends to be received, DDM can be adopted to bootstrap the market-implied cost of equity.

Table 2 Dividend Payout Ratio for 2001

Table 3 Return on Equity for 2001

Sustainable Growth Rate         = (1-Dividend Payout Ratio) * ROE

= (1-22.22%) * 16.9% = 13.1%

A growth rate of 13.1% is possible at early years if Nike’s revitalizing strategy is successfully implemented. However, Nike Inc. is not able to maintain such a high growth rate for long, due to fierce competition from other competitors such as Adidas, Puma and etc. Thus, we have made the following estimation of growth:

• High growth rate is achieved from 2002 to 2005;
• Growth rate starts to decline linearly from 2006 to 2011;
• Growth rate maintains at a low rate of 3% from 2011 onwards.

Figure 1 Hypothesis of Nike Inc’s Growth Pattern

Table 4 Growth Rate and Dividends from FY2002 to FY2005

FY 2006 onwards: (use H-model)

where:

H = half-life (in years) of high growth period

t = length of high growth period

gs = short term growth rate

gL =  long term growth rate

r = required rate of return of equity

Hence, Terminal value for FY 2005 = 0.79*(1+3%)/(r-3%) + 0.79*(6/2)*(13.1%-3%)/(r-3%) with a discount factor of (1+r)4.

To bootstrap using this 3 stages DDM model, we derive the market-implied cost of equity at: 5.16 %.

Advantages of DDM

1. The DDM model is easily understood and calculated. It takes dividends as a measure of cash flows. As dividends are less volatile than other measures such as earnings or free cash flows, the value estimates derived from DDM are less volatile and reflect the long term earning potential of the company.
2. Multi-stage DDM allows significant flexibility when estimating future dividend streams and can also be used for reverse engineering to calculate the implied required rate of return and growth rate.
3. It also allows for sensitivity tests for underlying assumption inputs and analyzing market reactions to changing circumstances.

Disadvantages of DDM

1. DDM is only appropriate for companies with a history of dividend payments and whose dividend policy is clear and related to the earnings of the firm. It cannot be applied to non-dividend-paying companies.
2. DDM values a company from a minority shareholder’s point of view; that is, dividends distributed by a company are highly subjected to management’s discretion and most of the time do not relate to profitability.
3. DDM are very sensitive to estimates of inputs, which are primarily difficult to gauge with precision by nature. Unpredictable growth patterns would make the model more sophisticated to be used.
4. Use of DDM to bootstrap the market implied cost of equity has one fatal drawback: the assumption that the current company’s shares are fairly priced by the market.

3. Earnings Capitalization Model (ECM)

The Earnings Capitalization Model (ECM) states that the cost of equity can be estimated as E1/P0, where E1 is the forecasted earnings for the upcoming year and P0 is the current share price.

E1 = E0 *(1+g) = $ 2.16 *(1 + 13.1%) = $ 2.44

P0 = $ 42.09

Hence, cost of equity is estimated at: $2.44/$42.09 = 5.80%.

Advantages of ECM

1. It is easy to use and calculate the cost of equity and fewer inputs are required.
2. The reciprocal, P/E values, can be easily accessed from various publicly available financial databases and mostly are consensus among a group of analysts.

Disadvantages of ECM

1. The ECM fails to consider the earnings growth of a growing company, as it uses only next year’s earning power to estimate a static cost of equity which would be applied across all years.
2. Earnings can be negative and earnings can be manipulated at management’s discretion.
3. Earnings are volatile and transitory. Using only 1 year’s forecasted earnings to estimate cost of equity can be highly biased.

Summing up, the cost of equity estimated by the three methods is as follows:

Table 5 Analysis of Cost of Equity

5. Determine Nike Inc’s Weighted Average Cost of Capital (WACC)

Up to this point, we have worked out the following:

• Market value of equity = USD 11,503,000,000
• Market value of debt = USD 1,240,000,000
• Cost of debt = 7.167%
• Tax rate = 38.0%

For the reasons provided in the preceding sections, we assessed the CAPM method to be a more suited method to derive the cost of equity of Nike Inc.

Based on the above, we derived the WACC by the following formula:

WACC = Kd (1-t)* D/(D+E) + Ke * E (D+E)

Table 6 Nike Inc’s WACC

6. Recommendation on Investment in Nike Inc

Using the calculated WACC and Kimi Ford’s Discounted Cash Flow (DCF) model, we are now able to make a recommendation to Northpoint Group on an investment in Nike. Generally, we agree with the assumptions made in the DCF model, as listed below:

1. The COGS/sales assumption of 60% is consistent with past performance between 1995 and 2001. A 2% reduction to 58% is a reasonable assumption to be achieved over the long term through increased efficiency from acquired experience.
2. The S&A/sales assumption at 28% reflects past performance and a reduction to 25% seems reasonable as it has been successfully achieved in the past.
3. The terminal value growth rate of 3% is also a reasonable assumption, consistent with long-term US economy growth rate, reflecting expectation of a mature firm’s long term growth rate.
4. Kimi Ford used data from 1995 to 2001 to forecast a 10-year financial performance from 2002 to 2011. We think that for a sports retail business, this forecast time horizon is too long and leads to inaccuracy because of the industry’s fast changing nature. A 5-year forecast horizon seems more appropriate as it is harder to predict results after this period. However, in this report we will adopt Kimi Ford’s model for comparability of valuation results.

Table 7 Selected Data Used in DCF Model

Inputting our calculated WACC of 10.61% into Kimi Ford’s DCF model, we derived the following cash flows and equity value per share.

Table 8 Nike Inc’s Equity Value Per Share ($)

Based on our computed WACC of 10.61%, we found Nike Inc’s intrinsic value to be $45.98 per share, which is higher than the current share price of $42.09. In this respect, we determine Nike Inc to be undervalued and on the premise of this undervaluation, recommend a BUY.

Relative Valuation

Portfolio or fund managers and professionals traditionally rely on market ratios (price multiples) to gauge whether a stock is fairly valued. The economic rationale for this method of comparables is the Law of One price, which asserts that two similar assets should sell at comparable prices.

In this section, we present such a valuation based the market ratio of P/E and P/B, benchmarked on the mean of Nike Inc.’s peer comparables’ price multiples. From tables below, we can observe that upon the time of valuation:

1. Peers’ Average Trailing P/E << Nike Inc.’s Trailing P/E
2. Peers’ Average P/B << Nike Inc.’s P/B

Hence, we can conclude that Nike Inc. was relatively OVERVALUED at the time when Joanna was carrying out the valuation. However, there are many limitations about the Relative Valuation Method.

Table 9 Table of P/E and P/B Ratios of Nike Inc’s Peers

Although the relative valuation method is simple and easy to understand, there are still some limitations to this method:

• The definition of a comparable firm is subjective and selected comparable companies spread across various countries and different market capitals.
• Use of other firms in the industry as the control group is often not a solution as firms within an industry can have very different business mixes, risk and growth profiles. No companies exactly have the same products and services, hence sales patterns and earnings patterns differ to a great extent.
• There is plenty of potential for bias, such as small sample size bias and survivorship bias. Mean is also highly sensitive to outlier data points.

Intrinsic limitations from the price multiples are present, for instance, earnings can be manipulated at management’s discretion and Book Value does not reflect the value of intangible economic assets such as human capital.All these limitations have restricted the credibility of relative valuation. In the search for valued stocks, the absolute valuation method will be preferred as it is founded on fundamentals. Hence, our recommendation is maintained as BUY.

7. A Post-Mortem Analysis

We shall move forward to the present and use the current data that we now have to assess the accuracy and correctness of our recommendation given in 2001. We will carry out this post-mortem analysis from two perspectives:

1. Trend of Nike Inc’s share price, P/E and P/B ratios at the end of each year from 2000 to 2008.
2. The assumptions adopted in the Discounted Cash Flow analysis against actual as derived from Nike Inc’s actual financial statements between 2002 and 2008.

1. Trend of Nike Inc’s Share price, P/E Ratio and P/B Ratio

In the following chart, we compare Nike Inc’s share price at the end of each year against its estimated share price based on its earnings and the average of its peers’ P/E ratios.

Figure 2 Chart of Nike Inc’s Actual Share Price and Estimated Share Price

From the chart, we found that Nike Inc’s actual share prices had indeed trend upwards from 2001 to 2007. In addition, the market somewhat consistently overvalued Nike Inc compared to its peers as Nike Inc’s actual share prices were above the share prices estimated from Nike Inc’s earnings and average of the P/E ratios of its peers.

Figure 3 Chart of Nike Inc’s P/E Ratio Against its Peers

The P/E ratios of Nike Inc are generally stable and higher than the average of its peers from 2000 to FY 2003.

Figure 4 Chart of Nike Inc’s P/B Ratios Against its Peers

The P/B ratios of Nike Inc have been consistently higher than its peers’.

2. DCF assumptions against actual data derived from Nike Inc’s financial statements from 2002 to 2008.

From Figure 5 below, we observe that the assumption of revenue growth is almost consistently lower than the actual figure. Actual revenue growth increased from 2002 to 2004 and from 2006 to 2008. Part of this increase is probably due to the more aggressive sale of Nike’s apparel line and the development of its mid-price athletic shoe products, the plan of which was announced in the analysts’ meeting of 2001. The revenue growth assumption is considerably less than the actual data, indicating conservatism in the forecast.

Table 10 DCF Assumption vs Actual Performance - Revenue Growth

Figure 5 DCF Assumption vs Actual Performance - Revenue Growth

Similarly, the DCF’s assumption on cost/ sales ratio has been conservative compared to the actual performance. Figure 6 shows that the cost/ sales ratio has declined faster that the assumption. This could be due to more effective cost control throughout the period, which was one of the management’s plans announced in 2001.

Table 11 DCF Assumption vs Actual Performance - Cost/ Sales

Figure 6 DCF Assumption vs Actual Performance - Revenue Growth

Selling and administrative costs over sales, however, increases over the period observed, contrary to the declining ratio assumed in the DCF model. This possibly indicates higher proportion of marketing expense in a product’s overall costs.

Table 12 DCF Assumption vs Actual Performance - S&A/ Sales

Figure 7 DCF Assumption vs Actual Performance - S&A/ Sales

A quick review of the current liabilities/ sales ratio shows that the actual ratio is higher than predicted, and with more volatility. In fact, throughout the period this ratio is almost double than that assumed, which may have increased the cost of capital. This could have resulted from less effective liability management.

This is coupled with the increase in the current asset/ sales in the same period, which consistently stayed above the assumed ratio. The sales to current asset ratio measures how well a company is making use of its assets in generating sales. An increase in the reciprocal, therefore, indicates a negative sign as the company uses less of its asset to improve revenue. This may have resulted in decreased amount of inventory or less investment opportunity.

Table 13 DCF Assumption vs Actual Performance - Current Liabilities/ Sales

Figure 8 DCF Assumption vs Actual Performance - Current Liabilities/ Sales

Table 14 DCF Assumption vs Actual Performance - Current Asset/ Sales

Figure 9 DCF Assumption vs Actual Performance - Current Asset/ Sales

Overall, however, Nike’s performance has been impressive with continuous growth between 2006 and 2008. It has been able to capture the increase in sports apparel demand fuelled by emerging market growth (e.g. Russia, China). Nike remains a clear leader in the athletic footwear market with 31% market share, and a dominant player in the athletic apparel scene with 7% of market share.  

Figure 10 Athletic Footwear Global Market Share

Source: Commerzbank Equity Research, February 2008

Figure 11 Athletic Apparel Global Market Share

Source: Commerzbank Equity Research, February 2008

8. Lessons Learnt from the Case

In this report, we’ve analysed Joanna Cohen’s way of computing cost of capital for Nike Inc. and pointed out various pitfalls she committed in calculations. In addition, we’ve also proposed different methods to arrive at the correct cost of capital for Nike Inc. and discussed the pros and cons for these alternatives. Based on the cost of capital, we obtained the justified equity value for Nike Inc. from the sensitivity test of DCF analysis and made our recommendation. Throughout the analyses, there are many significant points we’ve learnt in calculating cost of capital and executing valuation analysis.

• Weight of Capital Structure: The actual capital structure to be calculated using the market values (and not the book value) of equity, debt and preference shares. These weights would later be used in WACC computation – after-tax weighted sum of cost of individual component.
• Cost of Debt: The cost of debt is the required return on the company’s debt and is NOT the coupon rate but the yield or discount rate that equates all future cash flows to the price of bond. It is best estimated by computing the yield-to-maturity on the existing company debt.
• Cost of Equity: There are many methods to estimate the required rate of return on equity, such as CAPM, DDM, ECM and Multi-factor Model. Each model has its own assumptions, advantages and disadvantages. Hence, as an analyst, we need to consider the real situation of the company and take a stand which is the most appropriate.
• DCF Valuation: Discounted Cash Flow valuation method requires critical assumptions on the underlying cash flows. A long term growth rate in line with the country’s GDP growth rate would be hypothesized in the end to estimate the terminal value. As DCF is very sensitive to any assumption changes, it will be better-off to adopt sensitivity test to analyze different scenarios.
• Relative Valuation: Relative Valuation method can be engaged in conjunct with DCF valuation to derive the intrinsic value of the company. Either a simple relative valuation using mean or median of the industry price multiples or an industry wide sectional regression analysis can be used for this method.

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References

1. Brigham, Eugene F. and Joel F. Houston, Fundamentals of Financial Management, 11th Edition, Thomson, 2007.

2. Jonathan Berk and Peter DeMarzo, Corporate Finance, 1st Edition, Pearson, 2007.

3. Damodaran, Aswath, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 2nd edition, John Wiley & Sons, 2002.

4. CFA Program Curriculum Volume 4 - Equity, Level II 2009, CFA Institute.

5. CFA Program Curriculum Volume 3 - Corporate Finance, Level I 2008, CFA Institute.

6. Nike Inc. Corporate Website - www.nike.com

        

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