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A Monte Carlo Analysis on Case of Nike, Inc.: Cost of Capital

Referring to my previous post of,

I stated: “…But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) too. Because her assumptions such as Revenue Growth Rate, COGS / Sales,

S &A / Sales, Current Assets / Sales, and Current Liability / Sales have been adopted from previous income statements and balance sheets from 1995 to 2001. Perhaps, we can take new assumptions.”

As we know, the most crucial thing to bear in mind for a true financial analysis is to reach to the accurate and reasonable assumptions. We usually use from five years of annual reports to gather data from income statements and balance sheets as the sources of our assumptions. This is only an internal analysis and maybe it will be enough for small size companies. But to analyze the big size companies, we should not only have an internal analysis but also external analysis such as PEST and Porter’s Five Forces to find out competitive advantages. In this case, I have only examined the influence of the economic indicators included in Macroeconomic as driving forces but we as well as know to take a good external analysis, we should analyze the impacts of Political issues, Society-Culture, Technology and prepare a SWOT analysis compatible with value chain (value- added) and Porter’s five forces. This is only a sample of external – internal analysis for Case of Nike, Inc. in which I would like to expand a Monte Carlo Analysis on this case. How can we do our analysis?

In this article, I am willing to tell you the method of Monte Carlo Analysis done on the case of Nike, Inc.: Cost of Capital step by step as follows:

Ø  At the first, we should make a spreadsheet just like EXHIBIT 2 (Discounted Cash Flow Analysis) made by Kimi Ford. This spreadsheet will be our basic platform of the simulation model (Monte Carlo).

Ø  We should have so many scenarios on assumptions such as Revenue Growth rate (%), COGS / Sales (%), S & A / Sales (%), Tax rate (%), Current assets / Sales (%), Current liabilities/ Sales (%), Terminal value growth rate (%) and merge all scenarios to find out what the share price is most sensitive to assumptions. In fact, we would like to know which assumptions have most impact on enterprise value or share price.

Ø  To make the scenario analysis on your spreadsheet (Excel 2007), please go to Data – What-If Analysis – Scenario Manager – Add and write the name of scenario – Changing Cell – write the range of your assumption – Protection –Hide – OK.

Ø  I already made so many scenarios and I merged them together where I found that the assumptions of COGS / Sales (%), S & A / Sales (%) have most impact on share price and enterprise value.

Ø  Kimi Ford considered a range of COGS / Sales between 0.58 and 0.6, and a range of S & A / Sales between 0.25 and 0.28. These ranges could be compatible with five years income statement which is an internal analysis.

Ø  But to take an external analysis, we should find the economic indicators which are driving forces on COGS / Sales and S & A / Sales. Then we should consider the probability distribution for each range of COGS / Sales and S & A / Sales in accordance with data collected from economic indicators.

Ø  Firstly, the timing of our external analysis is very important. We should bear in mind that we are on July 5, 2001(the date of the Case). Therefore. We should collect and select economic indicators data before 2001 year to expand our projection of probability distribution for next 10 years until 2011year.

You can review the continuation of this article on below link:

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Tags: Analysis, Capital, Carlo, Case, Cost, Inc:, Model, Monte, Nike, Simulation, More…of


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