Graduate School of Business Administration 548 - Corporation Finance MBA.PM Spring 2006 Semester - J. K. Dietrich Financial Statement Analysis and Assumptions for Valuation Introduction Financial ratio analysis can be viewed as a systematic sequence of questions about the determinants of a firm’s performance. The analysis leads to an understanding of how a firm’s performance varies from period to period (time series comparisons), or how different firms in the same industry vary (cross-section comparisons). The objective is to understand the major sources of changes in a firm’s performance, important sources of variability in the firm’s performance, and to choose reasonable assumptions concerning the firm’s future operations. The analysis presented here is well established, is widely known as Dupont Analysis, and is the basis of many systematic approaches to understanding firms’ operations (like the BISECT analysis used by Professor Babcock of USC). It uses the formulas described in Appendix 2.1 but structures their use into a consistent framework leading to the underlying analysis needed for the assumptions used in projecting future cash flows, like those required in Worksheet 2, “Cash Flow,” of PVFIRM05. This discussion provides a conceptual framework and uses examples from the ratio section of the Wharton Compustat “Complete Financial Statements” (CFS) report available for listed companies from Wharton’s database, WRDSX. The discussion following uses Nike Corporation’s data for examples and the ratios included CFS report (provided in Table 1) and some additional analysis of Nike using the Excel data (Table 2) are attached for convenience. Table 3 reproduces the operating assumptions used for Nike 2003-2007 projections as an example of assumptions used throughout this handout. Ratio analysis is based on accounting information. Care has to be taken to know how ratios are calculated: they can be simple ratios of year-ending data or a ratio of an income statement item divided by the average of two year-ending balance sheet averages. Ratios sometimes compare accounting and market data (as in the “market to book” or MVEQ/BVEQ ratio in the CFS Ratio Report.) The ratios used for assumptions must furthermore be judged by the reasonableness of the results they generate. The ultimate criterion of an analysis is how persuasive and plausible it is, not whether it is “right” because there is no right answer about the future. Return on Equity (ROE) and Return on Assets (ROA) Since maximizing shareholders’ wealth or return on wealth is our objective function, it makes the most sense to focus on the accounting ratio that most captures that goal, the return on equity (ROE) as defined below. ROE can be further decomposed into three “sub-ratios” as follows: ROE EAC EAC EBIT SALES EBT ASSETS BVE EBT SALES ASSETS EBIT BVE where the following abbreviations are used: EAC = earnings available for common shareholders; BVE = book value of common equity; EBT = earnings before tax; EBIT = earnings before interest and taxes. 1 ROE (Return on Common Equity in the Wharton Ratio Report) for Nike can be found in the middle of the “Financial Statement and Market Relation” and has varied from a high of 28% to a low of 12% with an average (calculated on the right) of 20% and standard deviation of 5% over the period 1992 to 2001 (Nike’s fiscal year ends on May 31.) The variability ratio (standard deviation divided by the mean) is then about 25%. The question raised is, of course, what causes Nike’s ROE to vary from year to year. In order to explore the sources of a firm’s variation in ROE, we can focus on the determinants of a firm’s ROE. The square brackets break down the ROE into three sets of ratios that we discuss in turn: EAC (1 TAverage ) Pullthroug h EBT EBIT SALES ROA Earning Power SALES ASSETS EBT ASSETS Leverage Effects EBIT BVE Where TAverage is the corporation’s average tax rate. We discuss each of these sub-ratios in turn. Pullthrough: This is the firm’s average income passed through after tax (“pulled through”) to shareholders. Normally, this ratio should not change much from year to year unless the firm has substantial tax issues or there have been changes in corporate income tax laws. In the additional ratios calculated from financial data in the CFS shown in Table 2 using data on income before tax and taxes for Nike, the average tax rate is calculated as 38% with a standard deviation of 2%, implying a variability ratio of about 5%. Tax treatment is not normally a major source of year-toyear changes in ROE. Earning Power: This is the most important source of variation in ROE for most companies and one that we will examine below in more detail. For Nike, for example, the ROA in Table 2, calculated using operating income, sales, and assets from the Complete Financial Statements for Nike, varied from a low of 15.6% to a high of 28% with an average from 1992 to 2001 of 20% and a standard deviation of 19%, implying a variability ratio of nearly one, higher than the variability ratio of the ROE. For most firms, ROA is the key factor determining variations in ROE. ROA is determined by the firm’s sales, costs, and assets before financing or tax considerations, hence it represents the raw economic earning power of the firm. Many analysts call the firm’s ROA its earning power. We analyze factors affecting the firm’s earning power extensively below. Leverage Effects: There are two factors in the “leverage effects” sub-ratio: the first comes from two items in firm’s income statement (EBIT and EBT) and the second from two balance sheet items (ASSETS and BVE). Both are related to the firm’s financial structure. The difference between EBIT and EBT is the firm’s payments of interest to creditors. The difference between ASSETS and BVE are the total liabilities of the firm. For this reason, we can interpret these two ratios as measuring the impact of the cost of debt (in the form of interest expense) in the first factor and the amount of debt (in terms of assets not financed by equity) in the second factor of 2 the “Leverage Effects”. For most firms, changes in the cost of financing and financial structure are not major sources of year-to-year variation in ROE. In the Wharton “Financial Statement and Market Relation” report, Total Assets to Common Equity (the second factor) has varied from a low of 1.33 to high of 1.87 with an average 1.61 for the years 1992 to 2001. The ratio of EBIT to EBT is not calculated in the Wharton ratio report but could easily be calculated if sufficient concern about that variable warranted it. Analysis of a Firm’s ROA or Earning Power The firm’s ROA can be analyzed further by noticing the following: ROA EBIT SALES M arg in Turnover SALES ASSETS Two elements determine a firm’s ROA or earning power. The first is operating income, measured as EBIT, over sales, called “operating margin”. Note that operating margin is not influenced by financing or tax issues. The second element determining ROA is sales over assets, called “turnover”, and reflecting how may dollars of sales the firm’s management is able to squeeze out of each dollar of assets. These two relations form the basis for a sequence of questions relating to the firm’s operating cost structure and required investments Analyzing the Firm’s Margin Operating profits are calculated in the CFS as sales minus Cost of Goods Sold (COG), Selling, General and Administrative Expenses (SG&A), and Depreciation. Note that cost of goods sold does not include depreciation. You should check your “Income Statement” for the Wharton Complete Financial Statements to confirm your understanding of these calculations. Analysis of the firm’s margin typically uses a “common size” income statement where all costs are expressed as a percent of sales. Sheet 2, “Cash Flow,” of PVFIRM05 requires assumptions on the cost of goods sold (in the Complete Financial Statement’s definition, i.e. without depreciation) and sales and administrative expenses. The ratio report included in the Wharton Complete Financial Statements as shown in Table 1 below calculates COG and SG&A over sales. These two ratios average 59% and 27%, respectively, in the period 1992 to 2001. The cost of goods ratio had very little variation, while the SG&A has tended to increase. In the assumptions for Nike, I used 59% for the first ratio and 29%, its 2001 level, for the second. The management discussion explains the increase in SG&A as a percent of sales as coming from higher athlete endorsement costs so I assume the more recent results will continue to influence margins in the future. Other firms may display substantially more variation in the cost of goods as a percent of sales, where cost of goods are primarily labor and material costs. Cost of goods for firms anticipating changes in the cost of labor due to new processes, new contracts, or other reasons, should include those changes in the assumptions. Firms that probably will experience changes in material or energy costs also should have those expected changes incorporated in the cost-ofgoods ratio assumptions. Other factors may also influence assumptions concerning cost of goods and sales and administrative expenses. For example, if the firm is expanding, economies of scale would suggest that variable costs like costs of goods sold may decline as a percent of sales as the firm’s operations become more efficient. Sales and administrative expenses may also be spread over a larger sales base, implying a declining percent of those costs as a percent of sales. Of course, the 3 opposite assumptions may be valid for firms facing sharp sales declines or new operating procedures during an adjustment period. Depreciation in PVFIRM05 is not computed as a percent of sales but rather as a percent of net plant. The historical experience with depreciation and amortization as a percent of net plant is calculated using the Excel data in the Wharton data report and shown in Table 2. The ratio of depreciation to net plant is reported in the CFS ratio report in Table 1 as its inverse (one over the number) called “Age of Remaining Plant.” Table 2 demonstrates that the depreciation over net plant ratio has averaged 16% in the last ten years. I assume that to be true in the future. Analyzing the Firm’s Turnover A firm’s turnover is determined the assets required to support assumed sales levels. Of course, assets are either working capital assets (cash, inventory, and receivables), or fixed assets (net plant). PVFIRM05 approaches working capital assets and liabilities differently than fixed assets for reasons discussed below. Net Plant Assumptions PVFIRM05 models changes in net plant as an annual growth rate in net plant. This growth rate can be the same over the projection period or it can change from year to year. The reason for this approach to assumptions concerning net plant is that some firm’s capital investments are lumpy, for example a large plant expansion will be followed by several years of negative growth in net plant as depreciation charges are larger than capital expenditures. Usually management’s discussion of operations in the annual report or 10-K provides some sense for the likely future capital expenditures. On the other hand, if you are buying the company, you can assume your own capital expenditure program. Net plant will of course affect calculated net plant turnover defined as sales divided by net plant. Declining net plant and increasing sales imply increasing net plant turnover. Nike does all its manufacturing abroad through contractors and most of its net plant investments are related to corporate activities and distribution. Nike has recently spent quite a bit on capital expenditures (nearly $2 billion in the last five years reported by Wharton, an average of $382 million per year), but spent only $283 million on capital expenditures in fiscal year 2002. I assume that Nike’s net plant will grow more slowly in the forecast period and assume net plant will grow by only 1.5% per year. Working Capital Ratios affecting Turnover Inventory Turnover Ratio Inventory turnover (cost of goods sold divided by inventories) is used to project future levels of inventories in PVFIRM05. This ratio is calculated as part of the Wharton Complete Financial Statements report shown in Table 1. For example, Nike’s inventory turnover ratio has averaged 4.38 over the period 1992 to 2001, although there has been quite a bit of variation (standard deviation of the ratio is .4). The most recent year’s inventory turnover is 4.29 and I assume that 4.3 will be the future ratio of cost of goods sold to inventories. Accounts Receivable Accounts receivable represent payments due from customers buying on open-book accounts. PVFIRM05 models this as an average collection period in days, calculated on the Wharton Complete Financial Statements ratio report as Days Sales in Accounts Receivable. This 4 value is calculated by estimating daily sales as sales/365 and dividing average daily sales into accounts receivable balances. For Nike, the average has been 63 days but the last year’s average collection period was 62 days. I assume that the next few years’ collection period will be similar to Nike’s most recent experience, namely 62 days. Cash to Sales PVFIRM05 assumes that cash needs are determined by sales and therefore cash is set equal to a ratio of sales in projections. Table 2 uses data for Nike in the Wharton Complete Financial Statements to calculate the cash to sales ratio for the years of data provided. For Nike, this ratio has averaged 5%, although with substantial variability. Cash balances for companies often display substantial variability. There are several reasons for this. First, cash is of course a residual asset and year-end numbers may not be reflective of average performance. Cash is also subject to some year-end “window dressing” by firms, often because of restrictions on net working capital or working capital ratios placed by borrowing agreements or covenants of indenture contracts are usually measured using fiscal yearend audited financial statements. Another source of cash balances is that some banks require minimum cash balances as part of their banking arrangements with firms. PVFIRM05 makes a simple future cash balance assumption, namely that cash is a percent of sales. On the other hand, there may well be reasons why another basis for cash projections should be made and changes made in the spreadsheet cash calculations warranted. However, the PVFIRM05 assumption is not too unrealistic and changes in the spreadsheet should be done cautiously because of the many relations between variables built into it. Current Liabilities Current liabilities in PVFIRM05 are those current liabilities that can be expected to vary with the firm’s operations or sales, namely bank borrowings, accounts payables (or trade payables), and accrued expenses. The ratio of current liabilities defined to include these three sources of short-term funds to sales is the basis for projecting future short-term borrowings. Historical performance is provided in Table 2 calculated from data in the Wharton Complete Financial Statements. For Nike, the ratio of current liabilities defined this way to sales has averaged .18 but with a standard deviation of .04. To project the future, the Nike projections assume this ratio will be .14. This assumption is discussed more below. Asset and Liability Assumptions: Diagnostic Review Assumptions are only good if they are reasonable, can be defended, and produce credible projections. After making a set of assumptions, students should carefully review the projections in Worksheet 3, “Cash Flow.” Normally, assumptions should not produce large changes in any of the asset or liability categories unless they are the result of a policy change or an assumed change in the firm’s operating characteristics. For example, using a current liability of sales ratio for Nike of .16 resulted in unrealistic borrowing levels and cash inflows, so .14 was used. Each schedule should be reviewed for the reasonableness of the results it contains. The pro forma income statement and balance sheets, as well as the sample ratios at the bottom of the balance sheet, should also be examined for the plausibility of the projected values. Unless explicitly explained and justified, large changes in net income, net cash flows, capital expenditures, and other variables usually are not evident in projections resulting from reasonable assumptions. On the other hand, major changes can be assumed if the underlying assumptions are justified by references to management’s discussion of operations or if changes in the firm’s operations are planned and discussed. 5 Table 1: Ratio Report from Wharton Complete Financial Statements with Averages and Standard Deviations FINANCIAL STATEMENT AND MARKET RELATION TYPE ------------------------------------------------LIFE OF GROSS PLANT PLANT AGE OF DEPRECIATED PLANT PLANT AGE OF REMAINNIG PLANT PLANT CURRENT ASSETS / CURRENT LIABILITIES LIQUIDITY CASH / CURRENT LIBILITIES LIQUIDITY ACCOUNTS RECEIVABLE TURNOVER LIQUIDITY DAYS SALES IN ACCOUNTS RECEIVABLE LIQUIDITY DOUBTFUL ACCOUNTS/ACCOUNTS RECEIVABLE LIQUIDITY INVENTORY TURNOVER LIQUIDITY DAYS TO SELL INVENTORY LIQUIDITY ACID-TEST LIQUIDITY ROE/ROA FIN_LEV TOTAL ASSETS / COMMON EQUITY FIN_LEV AVG TOTAL ASSETS / AVG COMMON EQUITY FIN_LEV TOTAL LIABILITIES / TOTAL ASSETS FIN_LEV TOTAL DEBT / TOTAL ASSETS FIN_LEV TOTAL LIBILITIES / COMMON EQUITY FIN_LEV TOTAL DEBT /COMMON EQUITY FIN_LEV PREFERRED STOCK / TOTAL ASSETS FIN_LEV PREFERRED STOCK / COMMON EQUITY FIN_LEV OIADP / INTEREST COVERAGE OIADP / (INTEREST + PS_DIV) COVERAGE CASHFLOW - ASSETS PRE-TAX / INTEREST COVERAGE CASHFLOW - ASSETS PRE-TAX / (INTEREST+PS_DIV) COVERAGE RETURN ON COMMON EQUITY ROR RETURN ON TOTAL ASSETS ROR RETURN ON COMMON EQUITY (BEFORE EI&DO) ROR RETURN ON TOTAL ASSETS (BEFORE EI&DO) ROR INCOME TO CS / SALES ROR INCOME/SALES ROR INCOME ON ASSETS / SALES EFF SALES / AVG TOTAL ASSETS ROR COST OF GOODS SOLD / SALES EXP_SALE SELLING, GEN & ADMIN / SALES EXP_SALE DEPREC & AMORTIZATION / SALES EXP_SALE INTEREST EXPENSE / SALES EXP_SALES INCOME TAXES / SALES EXP_SALE EI&DO / SALES EXP_SALE ADVERTISING / SALES EXP_SALE RESEARCH AND DEVELOPMENT / SALES EXP_SALE PRICE / EARNINGS (PRIMARY) MULTIPLE PRICE / EARNINGS (PRIMARY BEFORE EI&DO) MULTIPLE PRICE / OPERATING CASH FLOW (PRIMARY) MULTIPLE PRICE / CASH FLOW TO EQUITY (PRIMARY) MULTIPLE PRICE / SALES (PRIMARY) MULTIPLE PRICE/ OIADP(PRIMARY) MULTIPLE PRICE / COMMON DIVIDENDS MULTIPLE MVEQ / BVEQ MULTIPLE (MVEQ + BV_DEBT) / TOTAL ASSETS MULTIPLE COMMON STOCK RETURN - FISCAL YEAR RETURN May-92 May-93 May-94 May-95 May-96 May-97 May-98 May-99 May-00 May-01 Average ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------9.46 8.93 10.57 8.81 9.03 8.91 9.2 11.59 11.98 . 3.2 3.26 3.99 3.4 3.19 3.26 3.38 3.92 4.38 . 6.26 5.67 6.58 5.41 5.85 5.64 5.82 7.67 7.6 . 3.58 3.15 1.85 1.86 2.05 2.07 2.26 1.68 2.03 2.26 0.64 0.92 0.2 0.18 0.24 0.06 0.14 0.12 0.17 0.31 6.22 5.53 5.42 5.39 5.93 5.57 5.43 5.76 5.95 5.77 5.70 57.86 65.13 66.43 66.75 60.75 64.6 66.25 62.54 60.53 62.38 63.32 0.03 0.04 0.04 0.04 0.04 0.04 0.05 0.04 0.05 . 4.39 4.22 5.1 4.9 4.73 4.3 4.08 3.94 3.89 4.29 4.38 81.97 85.22 70.56 73.45 76.15 83.72 88.24 91.29 92.46 83.87 82.69 2.12 2.18 1.15 1.1 1.18 1.05 1.21 0.85 1.08 1.3 1.32 1.3 1.3 1.43 1.54 1.6 1.52 1.51 1.63 1.64 1.6 1.51 1.33 1.36 1.6 1.63 1.7 1.65 1.57 1.87 1.67 1.68 1.61 1.36 1.35 1.49 1.61 1.67 1.68 1.61 1.72 1.76 1.67 1.59 0.25 0.27 0.37 0.38 0.41 0.4 0.36 0.46 0.4 0.4 0.37 0.23 0.26 0.37 0.38 0.41 0.4 0.36 0.46 0.4 0.4 0.37 0.33 0.36 0.6 0.63 0.7 0.65 0.57 0.87 0.67 0.68 0.61 0.31 0.35 0.59 0.62 0.7 0.65 0.57 0.87 0.67 0.68 0.60 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 23.07 32.06 27.03 23.24 24.68 12.69 16.42 19.41 14.88 22.43 21.59 23.03 31.96 26.98 23.21 24.66 12.68 16.4 19.39 14.87 22.41 21.56 15.81 44.7 15.33 12.32 8.31 4.85 18.23 14.79 10.82 7.99 15.32 15.78 44.56 15.3 12.3 8.3 4.85 18.21 14.78 10.82 7.98 15.29 0.25 0.18 0.22 0.25 0.28 0.12 0.14 0.18 0.18 0.18 0.20 0.19 0.14 0.15 0.16 0.18 0.08 0.09 0.11 0.11 0.11 0.13 0.25 0.18 0.22 0.25 0.28 0.12 0.14 0.18 0.18 0.18 0.20 0.19 0.14 0.15 0.16 0.18 0.08 0.09 0.11 0.11 0.11 0.13 0.09 0.08 0.08 0.09 0.09 0.04 0.05 0.06 0.06 0.07 0.07 0.09 0.08 0.08 0.09 0.09 0.04 0.05 0.06 0.06 0.07 0.07 0.1 0.08 0.09 0.09 0.09 0.05 0.05 0.07 0.07 0.07 0.08 1.94 1.66 1.73 1.82 1.97 1.78 1.65 1.62 1.63 1.61 1.74 0.59 0.59 0.59 0.59 0.58 0.62 0.6 0.58 0.59 0.61 0.59 0.23 0.26 0.25 0.25 0.25 0.27 0.28 0.29 0.28 0.29 0.27 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 . 0.02 0.01 0 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0 0.01 0.06 0.05 0.05 0.05 0.05 0.03 0.03 0.04 0.03 0.04 0.04 0 0 0 0 0 0 0 0 0 -0.08 -0.01 4.25 4.18 6.47 9.13 15.29 14.8 18.57 14.61 17.55 . 11.65 0.25 0.28 0.38 0.67 1.14 1.4 1.85 1.44 . . 0.93 15.3 14.9 14.5 26.62 21.46 33.33 38.33 20.42 18.85 21.67 22.54 15.3 14.9 14.5 26.62 21.46 33.33 38.33 20.42 18.85 21.5 22.52 21.06 7.72 22.74 44.65 46.64 25.66 17.96 15.56 16.9 . 24.32 29.07 8.31 . 114.32 . 224.01 25.02 . 20.45 64.97 69.45 1.42 1.17 1.22 2.28 1.86 1.39 1.97 1.31 1.17 1.45 1.52 9.14 8.93 8.77 15.71 12.56 15.73 20.62 12.23 11.11 13.47 12.83 103.57 73.75 87.64 182.5 164.29 104.55 126.95 89.32 85.63 111.98 113.02 3.34 2.48 2.87 5.93 5.27 4.05 5.16 3.69 3.16 . 3.99 2.76 2.09 2.17 4.03 3.51 2.84 3.64 2.44 2.3 . 2.86 0.26 -0.18 0.35 0.28 -0.42 -0.19 0.34 -0.29 -0.03 0.32 0.04 6 StdDev 0.28 2.99 0.40 7.34 0.45 0.13 0.16 0.14 0.06 0.07 0.16 0.16 5.87 5.85 11.13 11.09 0.05 0.04 0.05 0.04 0.02 0.02 0.02 0.13 0.01 0.02 0.00 0.00 0.01 0.03 5.68 0.61 8.01 8.02 13.11 77.10 0.38 3.75 35.45 1.20 0.70 0.30 Table 2: Ratios Computed using Wharton Complete Financial Statements and Averages and Standard Deviations May-92 611.43 3,930.98 2,187.46 27.95% 15.55% 1.797 May-93 498.63 3,789.67 2,373.82 21.01% 13.16% 1.596 May-94 661.42 4,760.83 3,142.75 21.05% 13.89% 1.515 May-95 938 6,470.63 3,951.63 23.74% 14.50% 1.637 May-96 1,360.08 9,186.54 5,361.21 25.37% 14.81% 1.714 May-97 844 9,553.10 5,397.40 15.64% 8.83% 1.770 May-98 837.4 8,776.90 5,247.70 15.96% 9.54% 1.673 May-99 966.4 8,995.10 5,856.90 16.50% 10.74% 1.536 May-00 998.6 9,488.80 5,819.60 17.16% 10.52% 1.630 May-01 Average StdDev 1,067.90 9,893.00 6,443.00 16.57% 20.09% 19.31% 10.79% 12.23% 11.90% 0.10 1.64 1.535 60.39 378 0.160 71.55 405.85 0.176 84.29 554.88 0.152 118.95 643.46 0.185 157.8 922.37 0.171 204.3 1,153.10 0.177 217.6 1,265.80 0.172 206.5 1,583.40 0.130 213 1,618.80 0.132 278.6 1,614.50 0.173 0.16 0.02 Income before Tax Taxes Taxes/EBT 594.52 229.5 0.3860 490.59 191.8 0.3910 649.86 250.2 0.3850 899.09 345.9 0.3847 1,295.22 499.4 0.3856 653 253.4 0.3881 746.1 294.7 0.3950 919.2 340.1 0.3700 921.4 331.7 0.3600 1,017.30 349 0.3431 0.38 0.02 Cash 291.28 518.82 216.07 262.12 445.42 108.6 198.1 254.3 304 575.5 135.7 108.17 138.56 3,930.98 210.58 127.38 181.89 3,789.67 297.66 397.1 345.22 4,760.83 455.03 445.06 480.41 6,470.63 687.12 553.15 570.5 9,186.54 584.6 480.2 608.5 9,553.10 373.2 419.1 653.6 8,776.90 543.8 924.2 621.9 8,995.10 432 855.3 472.1 9,488.80 504.4 425.2 768.3 9,893.00 Cash/Sales Current Liabilities/Sales 0.0741 0.0973 0.1369 0.1372 0.0454 0.2184 0.0405 0.2133 0.0485 0.1971 0.0114 0.1752 0.0226 0.1647 0.0283 0.2323 0.0320 0.1854 0.0582 0.1716 0.05 0.18 0.04 0.04 Net Income Cash Dividends Dividends/Net Income 365.02 53.02 0.1453 298.79 60.28 0.2017 399.66 65.42 0.1637 553.19 78.83 0.1425 795.82 100.9 0.1268 399.6 127.3 0.3186 451.4 136.2 0.3017 579.1 133.1 0.2298 589.7 129.7 0.2199 663.3 128.9 0.1943 0.20 0.07 Capital Expenditure 97.04 95.27 154.13 216.38 465.91 505.9 384.1 419.9 317.6 282.8 Net Plant Turnover 10.399 9.338 8.580 10.056 9.960 8.285 6.934 5.681 5.862 6.128 8.12 1.84 Data and Ratios Calculated from Wharton CFS Op Inc (Before Extraordinary Items and Special Charges) Sales (Net) TOTAL ASSETS EBIT/Assets = Return on Assets = "Earning Power" EBIT/Sales = Margin Sales/Assets = Turnover Depreciation+Amortization Net Plant Depreciation/Net Plant Accounts Payable Notes Payable Accrued Expenses Sales (Net) 7 8 Table 3: Operating Assumptions for Nike in PVFIRM05 Forecast Forecast Forecast Forecast Forecast Operating Assumptions 2003 2004 2005 2006 2007 Sales Growth Rate (percentage) 7.50% 7.50% 7.50% 7.50% 7.50% Cost of Good Sold (as a percentage of Sales) 59.00% 59.00% 59.00% 59.00% 59.00% Selling, Gen. & Adm. (as a percentage of Sales) 29.00% 29.00% 29.00% 29.00% 29.00% Depreciation (as a percentage of Net PP&E) 16.00% 16.00% 16.00% 16.00% 16.00% 0.00 0.00% 0.00% 0.00% 0.00% 36.00% 36.00% 36.00% 36.00% 36.00% 1.50% 1.50% 1.50% 1.50% 1.50% 4.30 4.30 4.30 4.30 4.30 62.00 62.00 62.00 62.00 62.00 5.00% 5.00% 5.00% 5.00% 5.00% 14.00% 14.00% 14.00% 14.00% 14.00% 20% 20% 20% 20% 20% Other Income/Expense (dollar) Tax Rate (as a percentage of Taxable Income) Net PP&E Growth (percentage) Inventory Turnover Ratio (COGS/average inv.) A/R (average collection period, days) Operating Cash (as a percentage of Sales) C/L (as a percentage of Sales) Dividend Payout Ratio 9