Final Report for Nike
In forecasting the future trend of the success of the business during the drafting of the proforma income statement, the revenue earned is assumed to decline in the next two years before it finally rises in the subsequent years. This is by calculating the net present values of the revenue items at a WACC of 12.2%. Time series analysis is done in order to forecast the future value of the various aspects of the company (Arnaud D& Nobert J 56). The gross profit margin is assumed to be constant at 43% hence enabling the proration of the revenue items. Assets of the company have been projected to increase by 51.5% in the succeeding years. It is in relation to the total current assets with no major change expected in the value of the fixed assets. Liabilities have been predicted to plateau with current liabilities expected to increase in 2016. Forecasting methods like regression analysis model can be used to determine the future position of the business.
Revenue expenses, as major components of the income statement, will be directly proportional to the amount of sales. The projected value is thus computed as a fraction of the total sales expected (Stefano C. & Stefano G 26). Costs of goods sold will also be regarded as fully dependent on the projected sales for the respective year of income. Other income statement components like the projected taxation, interest income and expenses as well as the amount of dividends to be paid are considered to be dependent on the prevailing market situations hence are computed using the discounting cash flows method in order to obtain the net present values. Accounts receivables and payables, as elements of the statement of financial position, are also dependent on the sales volume. Percentage of the sales volume is thus adopted in the determination of the values of such balance sheet components. Fixed asset values are computed less of the amount of depreciation expense expected.
Base Case Forecast and Analysis
Nike's sales revenue has been projected to reduce in the first two years before it finally begins to rise. This is the time related to the study and analysis of the market trends by the company's management in order to formulate better strategies that can enable it to survive in the market (Arnaud D& Nobert J 34). With the firm's policy of buying back its issued-out stock, the company intends to be in control of its capital that would reduce the costs related to the third parties who are privy to such an ownership contract. During the financial years 2014 and 2015, the sales volume will be reduced due to the buyback strategy. Nike will spend most of its cash in purchasing back the stock hence reducing its investment to concentrate on production. The effects of such an action will therefore manifest in the first two years of forecasting.
The company should thus engage in robust product promotion campaigns that would enable it to survive in the market. It includes extending its market base by developing a brand that most of the consumers can identify with (Stefano C. & Stefano G 23). Diversification of its operations is also an important pre-requisite to the rise in the revenue of the company. Strategies should also aim at cost minimization in order to maximize the return on the invested capital. This will in turn maximize the shareholder value. A capital-redemption reserve account should also be set up in order to ensure that the purchase of stock does not affect the profitability of the firm. As the company stabilizes, its revenues are then projected to increase which would in turn increase its earnings per share as from the third year in 2016.
Determination of the Weighted Average Cost of Capital (WACC)
WACC describes the average amount which a corporation should pay to its security holders. It refers to the average cost of financing a company's assets. In order for a company to satisfy all its creditors within its capital structure, it is important for it to earn a minimum amount of return equivalent to WACC (Arnaud D& Nobert J 36). It is the most commonly used as the discounting rate for the valuation of a company's project since the cost of financing the capital can best be used to determine the value of the investment.
In order to calculate the WACC for Nike, the following formula is used:
WACC = (E / V X Re) + (D / V X Rd X (1-Tx))
Where:
E = Market value of equity
V = Total value of debt and equity
D = Market value of debt
Re = Cost of equity
Rd = Cost of debt
Tx = Corporate tax rate
WACC = (97.9% X 12.42) + (2.1% X 2.49) (1- 0.247)
WACC = 12.16 % + (0.0523 X 0.753)
WACC = 12.16% + 0.04
WACC = 12.20%
The WACC calculated above will thus be used in the computation of the net present value of the any investment opportunity for the company. This is important in evaluating the viability of an investment option available. among many other range of options (Stefano C. & Stefano G 53). WACC assumes that the cost of debt and equity will remain throughout the duration. Companies without debt are thus limited in the determination of WACC. The higher the WACC, the better the returns for the business and vice versa.
Works Cited
Arnaud D& Nobert J. The Handbook of Structured Finance. NY: Saunders. 2007.
Stefano C. & Stefano G. Structured Finance: Techniques, Products and Market. NY: Springer. 2013
