Calculating Nike’s Intrinsic Value Using DCF Analysis

April 15, 2017

This article details how to construct an unlevered discounted cash flow (DCF) analysis for Nike Inc. (NKE) by using’s five-year valuation model. Note that unlevered free cash flow refers to the cash a business generates before paying any providers of capital such as debt and equity holders.

The basic philosophy behind a DCF analysis is that the intrinsic value of a company is equal to the future cash flows of that company, discounted back to present value. The general formula is provided in Figure 1. The intrinsic value is considered the actual value or “true value” of an asset based on an individual’s underlying expectations and assumptions.

Cash flows into the firm in the form of revenue as the company sells its products and services, and cash flows out as it pays its cash operating expenses such as salaries or taxes (taxes are part of the definition for cash operating expenses for purposes of defining free cash flow, even though taxes aren’t generally considered a part of operating income). With the leftover cash, the firm will make short-term net investments in working capital (an example would be inventory and receivables) and longer-term investments in property, plant and equipment. The cash that remains is available to pay out to the firm’s investors: bondholders and common shareholders.

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