DDM Valuation Nike Inc - Grade: A PDF

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DDM Valuation Nike Inc - Grade: A...

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Running head: NIKE INC DDM VALUATION Table of Contents 1. Introduction 2. Analysis Section 3. Summary/ Conclusion 4. References

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Running head: NIKE INC DDM VALUATION Introduction The dividend discount model (DDM) allows investors/ analysts to value a company’s shares and its equity. When utilizing the DDM we view the firm as a stream of dividend payments into the future in order to value the firm based on the dividends we are expecting to occur. The DDM values shares by discounting future cash flows from the firm’s present value. The most popular way to value a firm with a DDM is the Gordon growth model {P = D1 / (k-g)} by looking at next year’s annual dividend per share, growth rate, and the firm’s cost of equity in order to find the company’s current share price. However, this model presents some difficulties because it only demonstrates constant growth rates or when trying to value a firm which does not pay dividends. This formula works best for a mature firm that is paying dividends and isn’t really in that initial growth state. Therefore, this paper analyzes two types of DDMs; the constant growth DDM and the variable growth DDM. The constant growth DDM assumes that dividends will grow constantly at a fixed annual percentage. While the variable growth DDM, which is also known as the nonconstant growth model, divides growth into two phases. The first phase is a fast, initial growth phase followed by a slower transition phase with a lower rate. This analysis was completed by utilizing the DDM excel spreadsheet provided by the professor. All inputs to the spreadsheet were retrieved from Nike Inc. SEC 10-K report along with Yahoo Finance reported data. This paper will analyze findings through the use of the DDM and compare the intrinsic value to the current market value of the stock.

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Running head: NIKE INC DDM VALUATION Analysis Section Nike Inc.’s payout ratio is healthy and the company leaves ample room for reinvesting its earnings to grow. The company’s current stock market value is $74.74. As seen on the table below and on the attached Excel spreadsheet the constant and variable growth model are close to the current stock market value. The reason of the proximity of these numbers is due to Nike Inc. remaining and demonstrating constant growth in the past years. However, from my analysis I conclude that the intrinsic value of Nike’s common stock should be priced higher than its current price and its currently trading at a discount.

NIKE INC. DDM Stock Valuation Mod

Summary/ Conclusion The DDM was a useful approach for this valuation because Nike Inc. is a company that has demonstrated relative constant growth in the past years. The company is a firm that isn’t undergoing an initial growth state and is expected to continue to grow constantly in the coming years. “A cumulative dividend of $0.10 per share is payable annually on May 31 and no 3

Running head: NIKE INC DDM VALUATION dividends may be declared or paid in full. There have been no changes in the redeemable preferred stock in the three years ended May 31, 2017, 2016, and 2015” (Nike Inc., 2017) References Damodaran, A. (n.d.). Growth Rates and Terminal Value. Retrieved November 17, 2018, from http://people.stern.nyu.edu/adamodar/pdfiles/ovhds/dam2ed/growthandtermvalue.pdf UNITED STATES SECURITIES AND EXCHANGE COMMISSION. (2018). Nike Inc. SEC 10-K. Retrieved November 18, 2018, from https://s1.q4cdn.com/806093406/files/doc_financials/2017/ar/docs/nike-2017-form10K.pdf Yahoo Finance. (2018, November 18). NKE : Summary for Nike, Inc. Retrieved from https://finance.yahoo.com/quote/NKE/

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