Chapter_2
.pdfMinicases
M2.1. Reviewing the Financial Statements of Nike, Inc.
Introduction
This case runs through the basics of financial statements. It also introduces the student to Nike, a firm that gets considerable attention in the text. Much of the financial statement analysis in Part Two of the book uses Nike as an example. In
Part Three, Nike’s shares are valued as an illustration of techniques. The
BYOAP feature on the web site uses Nike as an example as it instructs students in building their own analysis and valuation spreadsheets.
The Nike analysis in the book and in BYOAP covers the period, 2000-
2008. So the student can get an appreciation of Nike’s evolving financial statements over a considerable period. This is a period when Nike went from being a “hot stock” to a mature company (as the second paragraph of the case indicates), so the student can also trace the revised pricing of the stock during this period as he or she also studies the evolution of the fundamentals.
The instructor may also use this case for a broader discussion of the accounting principles that were discussed in the chapter.
The Financial Statements
The financial statements in the case are reproduced here in case they are needed for case discussion.
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The Questions
A Shareholders’ equity = assets – liabilities $7,825.3 = $12,442.7 – $4,617.4
Liabilities are current liabilities plus long-term liabilities. Note that GAAP requires redeemable preferred stock to be classified outside shareholders’ equity – in what is called a mezzanine. This preferred stock has been included as a liability in the calculation above (as it is from a common shareholders’ point of view).
Net income = revenue – expenses $1,883.4 = $18,627.0 - $16,743.6
(Note that interest income is netted against interest expense)
Cash from operations + cash from investment + cash from financing – effect of exchange rate = change in cash and cash equivalents
$1,936.3 - $413.8 - $1,226.1 -19.2 = $277.2
B.Other comprehensive income is in the Statements of Shareholders’ Equity. It is made up as follows:
Foreign currency translation gain |
$ 211.9 |
Realized foreign currency gain |
(46.3) |
Loss on hedge derivatives |
(175.8) |
Loss on net investment hedges |
(43.5) |
Reclassification to net income of previous |
|
hedge losses |
127.7 |
Other comprehensive income |
$ 74.0 |
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Comprehensive income = net income + other comprehensive income
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$1,957.4 = $1,883.4 + 74.0
C. Net payout = dividends + stock repurchases – share issues $1,272.8 = $432.8 + 1,248.0 – 408.0
The share issues are to employees in exercise of options and direct issues. The forfeiture of shares by employees is treated as a negative share issue, but it can also be treated as a share repurchase.
D.Revenue is recognized at time of sale (that is, when title to the goods passes to the customer), less any discount for expected sales returns from customers.
E.Gross margin = sales revenue – cost of sales
$8,387.4 = $18,627.0 – 10,239.6 (as reported) Effective tax rate = tax expense/income before tax
=$619.5/$2,502.9
=24.75%
Note that any income reported below in other comprehensive income is always after tax.
ebit = Income before tax + net interest expense
= $2,502.9 – 77.1 (net interest expense is actually net interest
income)
= $2,425.8
Note the some people make an allocation of taxes to give an after-tax ebit (!!). ebitda = ebit + depreciation + amortization
=$2,425.8 + 303.6 + 17.9
=$2,747.3
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Depreciation and amortization are obtained from the cash flow statement where they are
added back to net income to get cash from operations.
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