Nike Equity Analysis and Valuation Report

Rachel King Tyler Toft

March 9, 2016

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Table of Contents Executive Summary .................................................................................................................. 3

Nike Overview and Analysis .................................................................................................... 4

Investments and hedging: ............................................................................................................ 5

Litigation: .................................................................................................................................... 6

Endorsements: ............................................................................................................................. 7 Risk Factors: ................................................................................................................................ 7

Trademarks and Patents: ............................................................................................................. 8

Altman Z: ................................................................................................................................... 8

DuPont Analysis: ....................................................................................................................... 9

Industry Overview: ................................................................................................................. 11

Footwear: ................................................................................................................................... 11

Apparel: ..................................................................................................................................... 13

Industry Ratio Analysis: ......................................................................................................... 14 Footwear Ratios: ....................................................................................................................... 14

Apparel Ratios: .......................................................................................................................... 15

Competitor Overview .............................................................................................................. 16

Adidas: ...................................................................................................................................... 16

Deckers: ..................................................................................................................................... 18

Competitor Ratio analysis: ..................................................................................................... 19

Market Model Regressions ..................................................................................................... 20

NKE Regressions: ..................................................................................................................... 21

Industry Portfolios against the Market: ..................................................................................... 23 Competitors against the market: ................................................................................................ 24

Sales Growth Analysis ............................................................................................................ 25

Factors Tested: .......................................................................................................................... 26

Regression Results: ................................................................................................................... 27

Forecast of Sales: ...................................................................................................................... 31

Depreciation Waterfall ........................................................................................................... 31

Constructing the schedules: ....................................................................................................... 31

Comparing numbers: ................................................................................................................. 33 Driver Calculations and Forecasting ..................................................................................... 36

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Expected Return Models ........................................................................................................ 40

Capital Asset Pricing Model (CAPM): ..................................................................................... 41

Fama French 3 factor Model: .................................................................................................... 41

Stock Valuation ....................................................................................................................... 43

3 Statement Discounted Cash Flow .......................................................................................... 43 Dividend Discount Model ......................................................................................................... 45

Comparables .............................................................................................................................. 46

Final Valuation ........................................................................................................................ 47

Works Cited ............................................................................................................................. 49

Appendix .................................................................................................................................. 50

Appendix 1: Altman Z ............................................................................................................... 50

Appendix 2: DuPont .................................................................................................................. 50

Appendix 3: Ratios .................................................................................................................... 51 Appendix 4: Regression Data .................................................................................................... 54

Appendix 5: Sales Growth ........................................................................................................ 57

Appendix 6: Depreciation Waterfall ......................................................................................... 63

Appendix 7: Drivers .................................................................................................................. 68

Appendix 8:Proforma Fincial Statements ................................................................................. 69

Appendix 9: Expected Return Models ...................................................................................... 72

Appendix 10: 3 Statement DCF ................................................................................................ 73

Appendix 11: Dividend Discount Model .................................................................................. 75 Appendix 12: Comparables ....................................................................................................... 76

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!Executive Summary NYSE: NKE – Mar 4 2016 – $61.24/share

Nike is one of the most recognizable brands today and dominates the footwear and apparel industry on a global level. Nike’s current annual sales total $30 billion and hope to grow to $50 billion by 2020. Nike’s stellar performance and growth is aided by innovation and product excellence. In this report we analyze all aspects of Nike’s company and compare how well Nike performs compared to its top competitors as well as the footwear and apparel industry.

We began by looking into the industry Nike competes in. By trade, Nike is a footwear company but has extended its brand into apparel and sports equipment. We decided to compare Nike to both footwear companies and apparel companies to see how strong the NIKE brand is and how well it performs compared to similar companies. To no surprise, Nike outperforms both the footwear and apparel industries in nearly all categories, most notably in operating income and net income. Nike’s margin on these two categories is greater than the industry by 4.5 and 8.5 times respectively. Operating Income indicates Nike is better able to lower costs in relation to sales and is more efficient compared to the industry. Similarly, small indirect costs fuel a higher net income, proving Nike is one of the leading brands in these two industries. Digging deeper in comparisons to Nike, we chose Nike’s top competitor in the two industries to further analyze Nike’s performance. The footwear industry’s top competitor to Nike is Deckers and the apparel industry is Adidas. However, Adidas is slowly falling as a top competitor and giving way to the growing company, Under Armour, so we compare Nike to both Adidas and Under Armour in the apparel industry. While Nike far outperforms these 3 companies in annual sales ($30B compared to Adidas $17B, Deckers $1.82B, Under Armour $3.96B), the Gross Profit Margin is similar for all 4 companies. However, Nike’s net profit margin is much higher than these companies at 11.55% meaning Nike is more efficient in reducing costs outside of COGS giving them a leg up against top competitors.

We also performed an Altman Z-score test and DuPont analysis of Return on Equity. Nike’s current Altman Z-score of 9.34 indicates Nike is in no danger of bankruptcy in the future. Additionally, they haven’t seen any historical signs of financial crisis as this score has consistently been above 5.5 the past 15 years and strengthening. Nike’s ROE is 25.8% currently, and after conducting the DuPont analysis we are confident a level this high is sustainable in the future.

We then tested how well Nike stock compares to the rest of the market and industries. Using Nike against the SP500 above the 3-month T-bill rate for the past 60 months resulted in a significant annualized Alpha-Hat of 0.1647. We believe on average Nike has been rewarded for idiosyncratic risk by 16.47% per year the last 5 years. For more confidence on this number we tested Nike against the Dow Jones and Russel 3000. Very similar numbers resulted from these two tests so we strongly believe Nike’s idiosyncratic return has been about 16% a year the last 5 years. Risk measures were calculated for Nike compared to the SP500 as well. Due to a statistically significant beta-hat of less than 1 for Nike, Nike has less volatility than the market. Idiosyncratic risk is responsible 88.1% of the total risk. While obviously a number closer to zero

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is more desirable, individual stocks carry a lot of idiosyncratic risk. We also tested the industry against the market to see how Nike performs compared to its industry. Combining the footwear industry portfolio with the apparel industry portfolio allowed us to analyze 8 top competitors at once. This regression yielded a non-statistically significant alpha hat greater than zero compared to the SP500 above the 3-month Treasury Bill rate. We are unsure whether the industry performed above or below the market, but we are confident that Nike did indeed outperform the market. This solidifies our idea that Nike is an industry leader and performs well above average.

In order to get final valuations of what we believe the fair value of Nike stock is we needed to determine the fair discount rates. Using the CAPM and Fama French 3 factor model gave us two reasonable discount rates to use in our valuations. These rates are 6.63% from the CAPM model and 4.66% from the Fama French model. To get valuations from a 3 Statement Discounted Cash Flow we needed to create proforma financial statements forecasting the next 5 years. To forecast sales and determine the next five years of growth, we used 5 macroeconomic factors. A total annual revenue for 2020 of $39.5 billion was predicted from this model. From the revenue numbers, we were able to forecast most of the financial statements using historical and projected ratios. To determine the depreciation expenses and purchases of Property Plant and Equipment we constructed a depreciation waterfall. Our model calculating historical depreciation expenses averaged a standard error of 2.35%, so we are confident our forecasted depreciation numbers are within reason of Nike’s future depreciation numbers. With all of these numbers forecasted we were able to obtain a 3 statement DCF fair value of Nike stock.

In addition to the 3 statement DCF valuation, we obtained a Dividend Discount Model fair value and Comparables fair value of Nike stock. From analyzing Nike’s market ROE historically and comparing it to competitors, we project a terminal ROE of 5.3% beginning in 2026, as well as a constant payout ratio of 40%. From these two numbers we can project the terminal dividend growth used in the DDM to give us the fair value of Nike stock. Using both the CAPM and Fama French discount rates gave us 2 values for the DCF and DDM each. With a total of 5 different fair values, we assigned a weight to each to obtain a final Fair Value of Nike stock of $130.37/share. Further analysis and details of the main findings above can be found in the rest of the report.

Nike Overview and Analysis Nike is the world’s largest seller and producer of athletic footwear and apparel. They sell their products here in North America as well as in 5 other international markets: Western Europe, Central and Eastern Europe, Great China, Japan, and emerging markets. Their products are distributed through retailers, including their own brand stores, and directly to the consumer through online sites.

Virtually all of Nike’s footwear and apparel is manufactured by independent contractors outside the US. This is a standard practice in the footwear industry as global markets offer much cheaper labor and have access to cheaper raw materials. While China has historically been Nike’s biggest manufacturer, recent reform in labor markets and an increasing economy has led to higher wage requirements. Looking at production in 2007, 2010 and 2015 you can see China’s contribution to Nike's footwear manufacturing drop from 35% to 34% to 32% while other markets rose, like Vietnam, who went from 31% to 37% to 43% in the same years. This exhibits Nike’s

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adaptability to and awareness of international trends and changes. Reaction to changing markets is crucial to a company like Nike who owes a lot of its success to low cost operations.

With manufacturing factories in about 40 different countries, and international sales being more than half of total revenues, Nike has close to 50 distribution centers outside of the US to aid in the efficient delivery of products to international customers, who bring in over 50% of Nike’s sales each year. The company began with sales only to domestic customers and when they experienced the immense success of overseas sales, they quickly grew their international operations, which dominated the business. While the North American market still brings in a substantial amount of overall sales, Nike has been making a push to expand its presence here and generate even more revenues from the US. They have been able to do so quite successfully with 2015 being the fifth successive year of double digit revenue growth in this geography. In addition, North American sales reached 47.87% of total revenues in 2015 as compared to 35.22% in 2010. Nike also expects to increase sales in Asia the next few years. Asia is expected to triple the middle class population by 2020, giving Nike a huge opportunity for a new target market as sports interest is higher amongst the middle class compared to lower classes.

Under the Nike business are four brands. The most profitable and well known is the NIKE brand, but they also operate Converse, Jordan, and Hurley. These three smaller brands are much more specific in terms of the products produced and target consumers resulting in much smaller product lines and smaller contribution to total sales. Nike uses these four brands to excel in youth culture. Through NIKE and Jordan, Nike reaches the sport culture, through Hurley the surf culture, and through Converse the music and creativity culture. The Converse brand is relatively unaffiliated with Nike as compared to the other brands and runs independent operations. For example, you can purchase NIKE, Hurley, and Jordan products from nike.com, but you must go to converse.com to find and buy converse brand products.

A new segment under the NIKE brand is Nike +, a completely digitalized brand that seeks to build a community of customers through the integration of technology. The development of multiple applications, like NIKE + Training club, which gives consumers access to free expert led workouts, arose with this brand. These applications build the communal feeling mentioned above by allowing consumers to share workouts and fitness progress through various social media sites. Nike seeks to motivate their customers to get active because this is turn motivates them to buy more Nike products to use while working out. This brand also includes a few physical products such as the NIKE + fitness band which tracks fitness data and syncs with smartphones to relay the recorded information. The development of this band has thrown Nike into yet another new product market and brought on new competitors such as Fitbit and Garmin who weren’t previous competitors.

Investments and hedging: NKE forecasts it will invest about 4% of their revenue, which is divided amongst short term investments, continued expansion of corporate facilities, new stores, and other digital capabilities. Other investments include stock buyback programs. Since 2008, 3 different stock buyback programs have been approved. The first purchased back $5 billion dollars’ worth of shares over four years. The next program in 2012 which approved a four year $8-billion buyback will end during 2016. The most recent program approved, to begin after the completion of the $8 billion program, will initiate another 4-year plan funded on $12 billion. This buyback program shows how confident and committed NKE is to continue its stellar growth, and signals that the

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executives believe Nike’s stock is underpriced and undervalued. As far as short term investments, a majority of the investments consist of available-for-sale securities. These investments are made of deposits held at major banks, money market funds, commercial paper, corporate notes, and U.S. Treasury obligations, amongst other investment grade fixed income securities. By making all short term investments investment grade, Nike minimizes their credit risk.

Nike also minimizes risk and the effect of foreign currency exchange rates by hedging certain foreign currency exposures using forward contracts and options. These activities reduce the volatility of both strong and weak U.S. dollars. In addition to reducing the risk of foreign exchange rates, Nike utilizes tax planning and financial strategies to manage their worldwide cash. Nike repatriates many foreign earnings, but reinvests the other earnings to avoid some U.S. taxes. Because of this, if additional capital is needed in the United States, Nike may raise capital through debt instead of bringing their foreign cash over to the U.S. Repatriating these funds accrues additional taxes for Nike, but if they elect to raise the capital through debt the additional expense would come in the form of interest.

Litigation: From time to time lawsuits are filed against Nike, however these are not common occurrences. Outlined below are a few of the biggest cases in the past 5 years.

2015 - The Jumpman Logo

Nike’s iconic “Jumpman” logo is the black silhouette of Michael Jordan responsible for billions of dollars in sales for Air Jordan, one of Nike’s shoe lines under the Jordan Brand. The original photographer of this image, taken in 1984, has filed a lawsuit against Nike claiming Nike infringed on his copyright of the photo. Nike filed a motion to dismiss the lawsuit. A loss in this case could result in a large sum of money paid to the individual for using the photo.

2012 – Nike vs Adidas

Nike filed a lawsuit against Adidas over violating Nike’s patent on knit sneakers. Nike lost the case in Germany and brought the case to the US where they lost as well. In 2015 Nike filed an appeal claiming its patent is valid. If Nike were to win the appeal it would further diminish Adidas’ market share in the US and further solidify Nike as the top innovator in the shoe industry.

2014 - Nike vs Adidas Trade Secret

In 2014 Adidas hired 3 of Nike’s senior designers to create and design new shoes for Adidas. Nike filed a lawsuit against the three designers for violating the non-compete agreements and breaching the privacy of Nike. The 3 designers recently filed a countersuit against Nike denying all allegations. Although a loss in this case would result in Adidas retaining the designers, Nike still controls 45% of the footwear market share in the US compared to Adidas’ 5.6%, so a loss would have little impact.

Over the years Nike has been involved in many different court cases. A majority of the cases however are not big cases taking away from the company as a whole. Once in a while Nike finds itself in the middle of a big case, and has even been involved in a few Supreme Court cases. We

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do not believe Nike is in any danger of any future litigation cases that will have a big negative impact on the company.

Endorsements: A pivotal piece of Nike’s success is strong relationships with professional athletes and professional sports teams. In 2015 Nike spent 10.5% of revenues on their demand creation expense alone. Included in the demand expense account are Nike’s advertising and promotion costs, digital advertising, brand events, and most notably, endorsement contracts. Endorsing professional athletes has been one of the top drivers of product innovation and sales growth for Nike. CEO Parker stated in the October 2015 investors meeting that Nike “works closely with athletes because athletes know what they need their equipment to do”, and that “this partnering [with top athletes] is the fastest path to innovation and the future of sport”. President Edwards added Nike “serves the needs of athletes, which drives Nike’s business” and noted the youth are more demanding now than ever, so when the youth see their favorite player wearing Nike, the youth want to obtain the same apparel."

Helping promote the brand, Nike has been at the forefront in signing big players to contracts. One of Nike’s most influential signings inked basketball icon Michael Jordan during his rookie year in 1984. Even though Jordan retired in 2003, the Air Jordan brand Nike created continues to release new shoes every year. Endorsements have also helped Nike break into different sports. In 1996 Nike broke into the golf world by signing Tiger Woods, and aside from the drama in the mid 2000’s, Nike Golf has become a leading golf brand which has led to signing other top golf names such as Rory McIlroy. Nike also has to compete with its competitors to sign top talent. A bidding war broke out between Nike and Under Armour in 2014 over signing Kevin Durant, which ended in Nike giving Durant a 10 year $300-million-dollar deal, strengthening Nike’s firm belief in relationships with top athletes. Furthermore, Nike became the first company to ever sign a lifetime contract, a deal with the face of the NBA, LeBron James. The terms of the contract are not yet available; the deal was announced at the end of 2015. Nike currently endorses top athletes in every major sport across the world, including top athletes in other countries, as well as sponsoring entire sports teams. On top of team and individual player endorsements, Nike sponsors entire leagues. Nike recently extended its contract with the NFL giving them exclusive rights to on-field apparel, and agreed to a deal to become the brand of the NBA in 2017. As other competitors are starting to endorse big players and teams, such as Under Armour, Nike has reinforced its position as the leading brand by continuing to sign bigger contracts with top athletes.

Risk Factors: Risk from competitors:

As technology and consumer preferences are rapidly changing, it is important for Nike to be at the forefront in adopting the changes. If Nike is behind in following these changes, it allows competitors an opportunity to exploit new opportunities and offer products consumers prefer before Nike can. Furthermore, Nike’s costs may increase from using older technology and consumer demand for Nike products may decrease, negatively affecting sales significantly. This risk is one of the main factors driving Nike’s innovation and anticipation in market changes, putting Nike ahead of the curve in comparison to its competitors. Another risk is failing to maintain a strong reputation and brand image. Nike’s iconic brands have worldwide recognition, making Nike’s success hinge on its ability to maintain and enhance brand image. To reduce this

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risk exposure, Nike maintains a strong brand image by endorsing top athletes. However, this leads to other risks. Recently, Nike terminated a contract with Manny Pacquiao after the boxer made derogatory comments directed towards a specific group. Terminating his contract demonstrates Nike’s commitment to a strong brand identity by reducing risks of negative publicity.

Macro risks:

Global risks and natural events are risks outside of Nike’s control. Exchange rate fluctuation can result in lower revenues, higher costs, and decreased margins and earnings. To reduce the volatility of currency exchange rates Nike hedges certain foreign currency exposures. While this reduces the negative impact of a stronger U.S. dollar it also reduces the positive impact of a weaker U.S. dollar. Other global economic conditions adversely affecting Nike include slower consumer spending, and volatility in the availability and prices of raw materials such as cotton and petroleum.

Trademarks and Patents: Nike takes full advantage of trademarks and patents on their products. Nike utilizes trademarks on nearly all of their products because they believe having distinct marks that are easily identifiable is an important factor in creating a solid market base for their product. Additionally, the trademarks distinguish Nike goods from the goods of competitors. ‘NIKE’ and the Swoosh Design are among Nike’s most valuable assets and thus have been trademarked in nearly 170 different jurisdictions worldwide. In addition to these well-known trademarks, Nike owns patents on technologies such as the “Air” technology. This technology uses a specific process in the manufacturing and design of Nike’s shoes. The patent allowed Nike to get ahead of the competition by having rights to this technology, however, the original patents on “Air” technology have expired and been replaced with new patents on similar technologies. Because some of the patents expired, competitors are able to use similar technology and compete with Nike’s “Air” technology. Nike continues to trademark and patent new products, ideas, and technology to ensure easily identifiable products and protection from competitors for innovation.

Altman Z: The Altman Z score computes a company’s credit strength test. This formula predicts how likely a firm is to go bankrupt within the next two years. Z-scores below .75 foretell financial difficulty and indicates the firm is likely to enter bankruptcy. To calculate the score, we used 5 different financial ratios and computed the Altman Z-score for Nike the past 15 years.

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Nike has historically been well above the ‘danger lies ahead’ line and the trend indicates Nike is growing further away from a Z-score of .75. Nike’s current Altman Z-score is 9.341. Compared to its competitors, Nike ranks above average. Under Armour has a higher score of 11.75, but Adidas and Deckers fall well below Nike at 3.86 and 6.02 respectively. These numbers also indicate the industry itself is not in danger of bankruptcy in the near future either.

DuPont Analysis: We will dive deeper into the drivers of Nike’s Return on Equity and forecast ROE the next 5 years. The DuPont analysis gives us greater insight on the factors affecting Return on Equity. We breakdown ROE into 5 categories; tax burden ratio, interest burden ratio, operating profit margin, asset turnover, and financial leverage or the equity multiplier. Since Nike is a large company and is more mature compared to some of its competitors such as Under Armour, most of the ratios will be constant. We divide the profit margin into operating profit margin, tax burden, and interest burden because focusing on operating efficiency gives us better insights on the company’s main driver of profit margin. We first take a look into Nike’s operating profit margin, which has largely stayed the same the past 10 years around 13%, so the ROE is not greatly affected by the operating profit rate. Since the operating profit is constant we can look into the other two drivers to analyze movements in the profit margin. Similarly, the tax burden has little movement the past 10 years. This is because the tax rate has constantly been around 24%, so we expect little difference in tax burden from year to year. The interest burden we expect to have increased recently as Nike grows and borrows more money to aid growth. However, sales are growing as well which in turn cancels the effect of borrowing more money and instead keeps the interest burden at a constant value as well. Even though Nike is in a revenue growth stage, from analyzing these three components that affect profit margin, we project the total profit margin to stay around 10%. The graph2 below illustrates how this value is achieved by the three components.

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Total revenue and assets have been increasing steadily the past 15 years, leaving an asset turnover rate around 1.5. However, since 2012, assets have been increasing at a higher rate than revenue which has caused the asset turnover to decrease slightly below 1.5. As Nike continues its aggressive approach to increase revenue, we expect their assets to continue to increase at the same rate to accompany the increase in sales. From this we think asset use efficiency will continue to be around 1.4 for the future years. One way Nike can improve asset turnover is by decreasing inventory, which increases inventory turnover rate. This would increase asset efficiency and ultimately have a positive impact on ROE. The final component of our ROE analysis is the equity multiplier. The equity multiplier had been steady around 1.5-1.6 from the early 2000s to 2012, but has since grown to above 1.8. The increase in the multiplier has been a result of Nike’s assets growing at a greater rate than equity since 2012, due in part to expanding facilities and pursuing higher revenues, thus needing more equipment and resources. Because of Nike’s growth, we forecast assets to continue to grow at a higher rate than equity in the next five years.

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As visualized in the above graph3, since we forecast the profit margin ratio to remain mostly unchanged, total asset turnover to decrease, and the equity multiplier to increase, we expect slight increases in the Return on Equity over the next five years but for it to remain in the same ballpark as the ROE in 2015 of .258.4

Compared to the apparel industry and footwear industry we assembled from top competitors, Nike ranks well above the average over the past five years in ROE. A few companies in the two industries have relatively low ROE’s therefore lowering the industry average ROE, possibly skewing the data. Regardless, Nike’s strong management and global dominance in apparel and footwear has and will continue to keep its ROE above the industry average.

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Industry Overview: Nike has grown into a very large company since its incorporation in 1969. This growth has led to domination in the footwear industry where Nike originally established itself. Expansion has also allowed Nike to have its trademark shoes be just a component of a now very diverse product line. The “swoosh” is no longer just on shoes but on apparel, athletic equipment, accessories, and even smartphone applications. The footwear industry remains Nike’s main business and is what most publications will categorize them into, but their growing presence in the apparel industry is enough to have us believe an analysis of both industries is necessary.

Footwear: Footwear Manufacturing is Nike’s primary Industry. It consists of over 300 companies and Nike is one of the industry leaders. Nike ranks number 2 in sales with $30,601 million, a mere .09% less than the top Bridgestone Corporation yet above the next in rank, Adidas, by more than 70%. These three companies are the only to reach over 10 billion dollars in sales, illuminating the immense size of Nike and its influence on the industry.

A majority of the companies in the industry do manufacturing overseas with little footwear manufacturing actually occurring in the US. Contracting to independent manufactures ensures lower productions costs for companies as well as easier access to cheaper raw materials. It tends to be the smaller companies that manufacture domestically, making it hard for them to compete

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against big companies producing large volumes of low cost shoes. Because this industry is so intertwined with international markets, the economies, tariffs, trade regulations, and politics of these countries are of interest to most footwear companies. For example, China is the largest supplier of shoes to the US, mostly because of the cheap labor, but they are slowly seeing a rise in the labor markets. This change is causing a shift in the locations to which companies are outsourcing their manufacturing. Other emerging markets, such as Vietnam and Indonesia, still remain low-cost and are becoming more popular amongst manufacturers.

Companies seek to keep costs low along the whole supply chain which is why most companies in the industry have multiple large scale distribution centers (the amount dependent of the company’s size) in order to get products delivered quickly. These centers must stay updated with the technology used, such as inventory and computer systems, or they will see financial consequences and be left behind as the competition follows with rapidly progressing technology. There is an abundance of new technology that act as opportunities for companies as they strive for efficiency, but failing to implement change and innovation is a major threat that companies must be aware of. Older, more stable companies often struggle to adapt and stay up to date with technology, as tradition is commonly deeply rooted in these firms, making change undesirable.

Demand in the footwear industry is driven by typical macro factors such as disposable personal income and GDP. The more spending power a household has, the more likely they are to purchase goods, including shoes. Fashion trends and seasonality are a huge driver as well. Back to school season is one of the highest revenue periods for footwear manufacturers as well as beginning of the winter. In addition, the strength of a company’s marketing is imperative to their prevalence and success. Matching the tastes of the firm’s target consumer and demographic is essential to their sales. Many of the leading companies are reliant on a loyal customer base and brand recognition, like Nike’s signature “swoosh”, to fuel their sales. One issue that does arise in an industry with branding being so important is the high rates of counterfeit production that occurs. Brands can carry immense value for a consumer, but individuals may be content paying much less to obtain a product that appears to be a certain brand instead of purchasing from the actual manufacturer. So while China produces many of the real products, they are also the biggest producer of counterfeit footwear.

So how is Nike the same and different from the industry? They follow the same manufacturing style with all production contracted overseas, especially in China, in order to reduce costs. This practice also keeps Nike on track with the industry in regard to material costs to revenue which averages about 50%. Over the past 10 years Nike’s costs have been, on average, equal to 55% of their revenues.

Nike is also up to date with technology and often even leads the competition with automation at every step in the supply chain. Rather than be threatened by the need for updated technology, Nike focuses on incorporating it as often as they can and often mentions it as an area of focus and cause of their success. In Nike’s 2015 10-K report they even refer to their use of technology as a potential risk factor because it is so fundamental to their operations that any disturbance in technology could be detrimental.

In regards to marketing styles of the industry, Nike has a very famous name coupled with strong brand awareness and loyalty. The logo has worldwide recognition and an association with quality, one of the reasons Nike is reaching such high sales levels. Nike is able to get their products in a multitude of retailers—the most common sales strategy of the footwear industry.

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On top of this, Nike’s brand strength allows them to run their own retail stores which a lot of companies don’t have enough brand awareness or power to do successfully.

Apparel: The apparel industry is composed of over 8000 companies and brings in 12 billion dollars of revenue a year. While apparel isn’t Nike’s main product line nor biggest revenue generator, Nike is still one of the biggest companies in the industry in terms of sales. Nike may not initially come to mind when thinking of who leads the apparel industry, but their size creates large impacts on the industry in comparison to smaller, but more apparel oriented, firms.

The US is one of the largest importers of apparel which reflects in the industry norms of conducting manufacturing overseas. While 90% of the market is imported, the US also exports 50% of its apparel. This trend of outsourcing, like that of the footwear industry, is due to the lower labor costs available internationally. The apparel industry is therefore also going to be affected by similar macro factors such as exchange rates, trade regulations, and international labor laws. While China is the primary country for manufacturing and exporting apparel as mentioned before, their historically cheap labor is increasing as more progressive laws are being passed. Some companies will try and get around this, possibly by employing illegal workers who they can pay significantly less, but organizations like the US Department of Labor regulates working condition domestically as well as abroad. The Department has many standards and can make unannounced inspections so it’s best for companies to be smart and seek low costs while remaining lawful. Nike is a great example of how engaging in unethical work may have short term payoffs but can negatively impact a company’s financials and image in the long run.

Fashion trends and consumer tastes are a driving force for the success of a company. The ability of a firm to adapt quickly to changes in style preferences is directly correlated to its success. One of the reasons Nike has been able to successfully expand into the apparel business is because of the trends of health and fitness that has spread nationally in the past few years. It has also been reported that casual dress, in day to day life as well as in the workplace, is becoming more common and acceptable, helping drive demand for Nikes casual and comfortable apparel designs. Also like the footwear industry, brand association and loyalty is crucial to increasing sales and the customer base.

Interestingly, technological advancements have had little effect in the actual manufacturing operations in the apparel industry. Production has attempted to be automated, but for the most part, clothing is still sewn by hand. Where technology does have an influence is in the computerized systems for keeping inventory and distributing product to retailers and customers. Even so, technology has had a very limited effect on the industry. Technology in terms of digital media and online communications has become an integral part in the sales and marketing aspect of the industry however. This is another way firms have been able to really promote their brand and differentiate themselves from competitors. Nike uses sites such as Instagram and Twitter to connect with their customers and even has a mini online web series on YouTube which seeks to motivate consumers to work out and engage in an active lifestyle, hopefully using Nike products to do so.

There are many similarities in the Footwear and Apparel industries, which is probably why Nike and many other companies are able to operate in both and remain in business. When looking at how Nike compares to the apparel industry, there is a lot of overlap with the analysis stated

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above in regards to the footwear industry. This includes their overseas manufacturing and incorporation of non-manufacturing technology into their business practices—both typical behaviors in this industry. In regards to the use of social media and online communications, Nike can be seen engaging in this strategy through different platforms. This unique incorporation of media differentiates Nike from competition and allows them to interact with customers in a new way.

Industry Ratio Analysis: After learning about the industries Nike competes in, we decided to look at the actual numbers of Nike with the industry to see how it performs against its competitors and determine if Nike truly is a leader. Industry ratios were obtained from Hoovers and Nike ratios were pulled from Mergent or calculated with the values on their financial statements, also pulled from Mergent. Hoovers ratios are dated 2014 so we looked at the ratios of Nike in the same year. There is a possibility for inconsistency in the ratios as we are unsure of the methods used by Hoovers and Mergent to produce the stated ratios. Their methods may differ from each other as well as from ours. For the sake of comparison, we will assume the ratios to be consistent in their derivation.

Footwear Ratios: We began our analysis with the footwear industry. Of the 304 companies in the industry, only Nike and 15 others make up the “large” category with sales of over $50 million. When we looked at each ratio, we saw that the numbers of the large companies often matched those of the industry as a whole, and no difference was in excess of 1%. Because of the little variation, we chose to compare Nike to the entire industry. There are many areas in which Nike follows the trends of the industry, but the more interesting ratios are in the areas in which Nike strays from the norm.

Footwear Industry Industry6 Nike7 %change (Nike/Ind.) Gross Margin 32.500% 44.771% 37.758% Operating Income 2.100% 12.867% 512.732% Net Income 1.000% 9.687% 868.740% Cash 8.700% 11.939% 37.234% Inventory 32.800% 21.227% -35.283% Inventory Turnover 2.77 4.16 50.181% Net Worth 58.200% 58.212% 0.021% Total Debt to Net Worth 0.72 0.13 -81.944%

Gross margin for example is an area in which Nike outperforms the industry. This entails they have much lower direct costs than the other firms in the industry as their gross profit to sales is 37.8% higher. Further, Nike’s net income to sales percentage is 868.7% higher than that of the industry so it can’t be argued that Nike endures a lot of costs indirectly to offset the low direct costs. Nike’s ability to run such a low cost production gives them a major advantage over its competitors and allows them to have high margins.

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Nike’s cash level is also significantly above the market by 37.2%. Having all this cash on hand is one of the reasons Nike has been growing their dividends pretty consistently and also initiated huge buyback programs.

When comparing inventory levels, Nike has a much lower value than the industry. While it is typical for a firm to have about 32.8% of total assets be inventory, Nikes inventory only accounts for 21.2%. In this case, we believe the lower percentage benefits Nike. Nike utilizes many advanced inventory technologies that enables them to closely monitor and prevent excess inventory. On top of this, they have a futures ordering program that allows retailers, domestic and international, to place orders 5-6 months in advance which also helps in their ability to prevent excess inventory. This also justifies why Nike has a much higher inventory turnover, 50.2% more than the industry. Higher turnover is more beneficial because the longer inventory sits the more likely it is to lose value.

Nike’s net worth aligns closely with the footwear industry average, only higher by .021%. While they aren’t outshining competition in terms of equity, they also aren’t falling behind so this isn’t a concern. While their net worth isn’t anything impressive, their debt is only 13% of total equity. This is 81.9% less than the industry average. With only 13% of equity being due to debts, Nike is considered low risk because it hasn’t needed to borrow too much to fund its growth. It’s common for companies to take on a lot of debt in order to generate more sales but Nike is successfully seeing high revenues with little leveraging. The low debt to equity ratios could also mean they are simply able to pay off their debt at high rates which correlates with their higher than industry average cash ratio.

Apparel Ratios: Next, we looked to the Apparel industry in which Nike also competes. While they are one of the biggest companies in the industry in terms of sales, we were unsure if they dominated this industry as much as they do the footwear industry. Although this isn’t their primary industry, the Nike brand has become very prominent in this industry due to the popularity of their athletic apparel. For these comparisons, we also looked at the ratios associated with all 8157 companies as opposed to just the 63 companies with sales greater than $50 million.

Apparel Industry Industry8 Nike % change (Nike/Ind.) Gross Margin 31.300% 44.771% 43.040% Operating Income 2.300% 12.867% 459.451% Net Income 0.900% 9.687% 976.378% Cash 5.800% 11.939% 105.851% Inventory 35.200% 21.227% -39.695% Inventory Turnover 4.280 4.16 -2.804% Net Worth 56.000% 58.212% 3.951% Total Debt to Net Worth 0.790 0.13 -83.544% Total Assets to Sales 46.700% 65.071% 39.338% Working Capital to Sales 19.700% 33.039% 67.710%

The Apparel and Footwear industries didn’t look too different in terms of what is common amongst each industry. They both fall under the larger industry of manufacturing, a reason for

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these similarities. Because they are related, many areas analyzed in the previous section hold true in this industry as well.

For example, Nike has significantly higher gross margin, operating income ratio, net income ratio, and cash to assets. This was all true in the footwear industry as well and can be explained by the same reasoning found above. Nike has a 39.7% lower inventory to assets ratio than the industry, similar to how they compare to the footwear industry. However, while Nike also saw an inventory turnover that was 50.8% greater than average of the footwear industry, they see 2.80% less inventory turnover than the apparel average. So even though Nike is able to have low levels inventory in comparison to industry, other companies are able to get rid of their higher levels of inventory faster. A 2.8% lower turnover isn’t bad when comparing the total numbers, but it seems contradictory when comparing it to the difference in inventory ratios. While their turnover puts them ahead in the footwear industry, it puts them right around the average in the apparel industry and may be an area they should focus on so as not to fall behind more.

Again, the relationship between Nike’s net worth and the industry is about average while their total debt to worth is -83.5% less than the industry average. The previous writing on the footwear industry gives reasoning and analysis on this difference and therefore doesn’t need to be restated.

In regards to total assets to sales, Nike has a ratio of 65.1% while the Industry on average is 46.7%. This means that other companies in this industry are able to generate more sales with less assets than Nike is. Even though Nike has some of the highest sales in the industry, this ratio indicates they aren’t being as efficient in the deployment of their assets as other firms in the industry are. If Nike was able to match the industry average with their level of assets remaining constant, they could obtain sales even larger than they are currently generating. This difference is further illustrated with their higher working capital to sales ratio which is 67.7% greater than the industry average. Working capital looks at the firm’s assets minus its current liabilities and also reflects a company’s efficiency in the use of those assets to generate sales. As mentioned before, Nike clearly has the ability to generate high levels of sales and by better utilizing their assets this generation could be further increased.

Competitor Overview Adidas: One of Nike's biggest competitors is the German company of Adidas-Group, more commonly referred to as Adidas. This company designs and produces athletic apparel, footwear, and equipment. The athletic focus of these different markets is the same strategy employed by Nike and is one of the reasons they are such rivals. It is the number 3 sporting goods manufacturer, according to Hoovers, behind Nike and Under Armour.

Adidas has 4 major brands, which are further segmented, under its business. The four main brands are Adidas, Reebok, Taylor Made, and CCM. Each of these brands, and their segments, target a specific consumer with their products tailored to meet the preferences of that market. For example, the Adidas brand itself is broken down into 3 sub-brands: Sport Performance, Originals, and Neo. Adidas Sport Performance is geared towards serious and competitive athletes, sponsoring events such as the World Cup and the Olympics, while the Adidas Originals brand is tailored towards the less competitive athlete who still values an active lifestyle and high quality products. The third and newest segment is Adidas Neo which targets teens and works to merge fashion and athletic wear.

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Reebok, which was acquired by Adidas in August of 2005 is another brand under the Adidas-Group parent company. This acquisition was big news for Adidas as it demonstrated their desire to better compete against Nike, who was clearly dominating the market, by increasing their market share. The acquisition benefitted Adidas initially, but since then, Reebok’s market share has decreased significantly allowing Nike to remain superior and more prominent in the market. A Statista Study ranks athletic companies based on brand values (as calculated by Forbes) and reports Nike as having $26 billion worth of brand value as compared to only $6.2 billion for Adidas and a mere $0.83 billion for Reebok. These 2015 numbers show the Nike brand is still the one to beat, and having Reebok as part of Adidas’ business isn’t reaping the same benefits it did 10 years ago when purchased for $3.8 billion.

Their last two brands, TaylorMade-Adidas Golf and CCM-Reebok-Hockey are very consumer specific. They both produce apparel and equipment specific to the golf and hockey industries respectively. These brands are tailored for professional and serious athletes, not for the everyday semi-active individual. Therefore, these brands contribute a much smaller portion to overall revenue and market share of the company.

Having so many branches of the Adidas brand allows them to engage in more specialized and successful marketing practices as their target markets are very specific and clear. Further, they can focus on one customer group at a time rather than try to make products and campaigns speaking to high-performance athletes and teenagers alike. The benefit of being able to focus on a target market, though, is offset by the potential of losing brand value. A company with so many different segments and divisions runs the risk of losing the power of their brand by becoming too diluted across markets. For example, even though Nike has multiple brands as well, all the Nike Brand products are characterized and labeled with their iconic swoosh. While Adidas is known for its 3 stripe logo, the three divisions under the Adidas Brand —Neo, Originals, and Sport performance—have three different logos. This can cause confusion with the consumer and take away from the recognition the Adidas brand.

Adidas acts as a wholesaler, distributing products to big retailers, but also runs retail operations of their own. They sell directly to consumers through both physical retail shops and online through their website, but 2/3 of sales comes from wholesaling operations and putting their product on the shelves of other retailers. As online shopping and the internet is becoming a more prominent mode of commerce, their online shops are seeing increasing sales. In 2014 alone, the ecommerce sales grew 72% on a currency-neutral basis. This growth, if it continues, could make retail the primary revenue generator and presents a major opportunity for building sales.

As a foreign based company, Adidas sees about double the sales, 40%, in Europe than in North America, 20%. While they produce over 660 products, footwear is where the majority of revenues come from—similar to Nike. Almost 50% of Adidas’ total sales are due to the Adidas Brand shoes. With so many brands contributing to sales, the fact that a single product of just one of these brands is responsible for half of its sales clearly demonstrates the importance of making sure new footwear companies don’t enter the market or steal market share from Adidas as without the success of this product, there would be no success of the company.

Adidas has many partnerships within the athletic realm. They partner with a number of sports teams, professional, college and others, as well as major organizations such as FIFA and the NBA. These deals not only give Adidas a lot of publicity and expose their products to a wide range of consumers, but they are a testament to the quality of their products as well. They have

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even been working with some non-athletes, like Selena Gomez and Justin Bieber, to endorse and help design products for their new Adidas Neo line. The ability to have such big name partners, again, brings a lot of attention to their brand increasing its awareness.

While its crucial for Adidas to have plans for growth and sustainability in order to remain a top competitor in this industry, it’s equally important that they aren’t too ambitious or set unrealistic goals. In 2010 Adidas announced a 5-year plan for growth called Route 2015 outlining new strategies that were going to achieve 50% growth by the end of this time period. They planned to open 2,500 new retail stores in China alone as well as gain more of the American market share, but these approaches weren’t enough. During these 5 years, Adidas saw major declines in their golf lines and even sold off one of their brands known as Rockport in a scramble to raise cash. In 2014 they announced the postponement of their Route 2015 results as they weren’t happy with the results. While Adidas is still at the top of the competitor list, being unable to reach these goals they so publicly announced, had negative impacts on the company’s image and made their struggles known on a global level. This represents a major weakness for Adidas and if management makes more mistakes like this there could be more detrimental effects.

Deckers: Deckers Outdoor Corporation is a specialty shoe company and one of the prominent companies in the footwear industry. While this company doesn’t fall under the sporting goods category like a majority of Nike's competitors, we thought it’d be good to look at a strictly footwear company to see how their strategies differ from a company like Nike whose main focus is footwear, but also produces a multitude of other products.

Deckers’ most well-known brands include Ugg and Teva. Counterfeit is a negative aspect to the footwear market as a whole, but Deckers, especially its Ugg brand, experiences this heavily. A boot like Ugg is susceptible to counterfeit because it is a high-priced item that is very much a fashion trend and desired by many consumers. Those who want to emulate the image of Ugg without paying the high price may look to other alternatives. Countries like China will make identical products, label and all, and sell it for a fraction of the price. Because this is an illegal practice, it is prevented to some extent, but obviously not every counterfeiter can be stopped. Ugg faces stolen sales from legal practices as well like that of copycat products. The number of look-a-like boots on the market is extremely high, and the prices significantly lower. There is no illegality in this practice as these companies just create a product with a similar design while utilizing their own label and name instead of pretending to sell it as a real Ugg boot. This increase in competition is a natural consequence of having a popular product because companies chase profit. Despite all this rivalry, Ugg manages to bring in 58% of total sales for Deckers.

Deckers sells its products both domestically and internationally but gets the majority (68%) of revenues from the US. They distribute to over 100 retailers while also distributing products through their own retail shops, catalogs, and websites. Because of the premium quality and marketing of their products as specialty items, Deckers is picky about who can carry their product. Their biggest customers include Nordstrom’s, Neiman Marcus, Sports Authority, and other high end department stores. Deckers keeps their brands very independent, with brand specific online and retail stores, because each differs significantly from each other and are subsequently targeted towards very different consumers.

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An area of opportunity for Deckers is the new trend of concept stores, which they are already a part of. A concept store is a new twist on common retail store that focuses on the atmosphere and ambiance of the store in an attempt to bring the brand to life and make shopping a full experience. Everything from location, lightings, colors and more is very thought out in order to create the right image for the brand. For example, an Ugg concept store recently opened in Houston, a fashion-savvy city, and features frosted glass windows, zebra wood, and a champagne metal finish. With this design, Deckers is to portray the premiere quality and fashion forwardness of their Ugg brand. This strategy gives Deckers a leg up as they are leading in this trend so their store stands out amongst competitors running the typical brick and mortar store.

This strategy, while advantageous is many ways, has come with large investments in advertisement. From 2010 to 2012 alone, Deckers experienced a 137% increase in advertising expenses. Other costs have also been increasing, causing a negative net income of -$2.7 million in 2014. So while these branding techniques help to differentiate a product, the associated costs can be severely negative if not carefully monitored.

Another potential area of concern for Deckers is keeping each brand profitable. While Ugg continues to bring in the majority of sales and doesn’t really run the risk of becoming unprofitable anytime soon, the smaller brands aren’t able to gain the same brand power Ugg has and therefore have to work harder to increase sales. Teva, Deckers' heritage brand, barely survived the economic downturn, and since has been trying to rebrand and increase the popularity of the shoe to increase sales. Again, this requires increasing costs which must be heavily considered to determine if the costs will eventually pay off.

Competitor Ratio analysis: Industry ratios were analyzed in a previous section, but we thought it would be additionally beneficial and insightful to compare some of Nike's ratios to a few individual competitor ratios. For this analysis we looked at the two companies from above, Adidas and Deckers, as well as a third rival, Under Armour. These numbers were obtained from Hoovers and are representative of the year ending 2015.

NIKE Adidas Deckers Outdoor

Under Armour

Annual Sales $30.60B $17.67B $1.82B $3.96B Gross Profit Margin 0.4632 0.4764 0.4594 0.4808 Net Profit Margin 0.1155 0.0337 0.0802 0.0587 Price/Earnings Ratio 27.5 12.08 10.26 74.64 Inventory Turnover 7.16 6.85 5.53 6.01 Days Inventory (COGS) 94.92 150.41 122.11 117.05 12-Month Revenue Growth 0.0531 0.0029 2.8448 0.2852 12-Month Net Income Growth 0.2096 -0.3776 10.3494 0.118

When comparing these companies just in terms of sales, it’s obvious that Nike is by far the largest. With 30.6 billion dollars in sales, Nike brings in at least 73% more revenues than the other companies and clearly has the most market share. Despite these size differences, each firm sees about the same gross profit margin, between about 46-48%, implying the direct costs endured to generate the same amount of sales are relatively similar. However, their net profit

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margins differ quite a bit, Nike with the highest of 11.6% and Adidas with the lowest of 3.37%. While the proportion of direct costs between these firms is comparable, where Nike is able to gain a competitive edge, and Adidas struggles, is with the amount of indirect and other costs that subtract from sales. High sales are more impressive if there aren’t high costs that outweigh them, which, by looking at these numbers, it appears Nike is able to pull off.

For the spread of price to earnings ratios across these four firms, Nike and Under Armour have higher P/E’s while Adidas and Deckers have lower P/E’s in comparison. High P/E ratios tell us that an individual is willing to pay more for a dollar of earnings of that company which often indicates that the company is expecting high earnings growth. With an industry median of the P/E ratio at 28.86, it seems these companies lie in the tail ends, with the exception of Nike, of the industry as a whole. As examined in the company analysis for both Adidas and Deckers, it was obvious they are both experiencing some earnings issues so their lower P/E’s aren’t surprising. In addition, with Nikes historical earnings growth and earning plans for the next 5 years, their ratio seems reasonable as well.

Another ratio in which these companies seem to have equal performance in is the inventory turnover, with numbers from 5.53-7.16 it seems they are all efficient in inventory management. This is important as excess inventory is often a major downfall for companies as older items become less valuable and companies end up losing revenues when they can’t sell the inventory on hand. Although it’s not by much, Nike has the highest turnover (7.16) which subsequently gives them the lowest days in inventory (94.92). This ratio again just reinforces how well Nike is able to manage their inventory levels and effectively sell the products on hand.

The last area we wanted to compare is how these four companies have grown over the past year. These numbers are all over the board with little similarity in how the companies have progressed in the last year (2014-2015). The first area of growth, revenue, is led by Deckers with a massive 284.5% increase and trailed by Adidas with a mere .29% growth. Deckers had a very rough year in 2014, with low sales and a negative net income, so this massive revenues growth indicates them coming back from the negative year. It’s important to note that this high percentage is not typical of Deckers, but rather an abnormality resulting from an off year. Despite this off year however, it shouldn’t be ignored as it could be a sign of Deckers regaining strength and becoming a tough competitor in years to come. Nike grew their revenues by about 5.31%, beating Adidas, but falling below Under Armour at 28.6%. Under Armour has seen a lot of success in recent years and are second in line behind Nike in the sporting goods industry. If these rates of growth continue into the future, Nike may see their market share chipped away by Under Armour.

Even though Nike saw less revenue growth than Under Armour, they saw a 77% higher net income growth. So while Nike’s sales weren’t growing as fast, the amount of net income they receive per dollar is increasing more rapidly. Unfortunately for Adidas, their low revenue growth is coupled with a decrease in net income over the past year indicating their costs rose at a higher rate than revenues. Deckers net income shot up by 1035% taking them out of the negatives and back to a point where sales outweighed costs.

Market Model Regressions In order to compare Nikes performance against that of the market and other firms, we ran multiple regressions and analyzed the computed alpha-hats and beta-hats, ran hypotheses tests,

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and calculated confidence levels to gain some insight as to where Nike stands next to its competition. We first pulled historical data for Nike9, including its closing price, dividends, and stock splits. Using this, we compiled monthly IRR's beginning in January 2001 up until December 2015. We had to then decide what we were going to use as the variables in our regressions. For representations of the market10, we pulled historical prices for the S&P500 (with dividends added), the Dow Jones Industrial Average (DJIA), and the Russell 3000 (RUA). We wanted to somehow run a regression of Nike against its firm specific industry. While it is included in things such as the Dow Jones U.S. Footwear Industry, we could not obtain any historical data to be used in a regression. Therefore, we constructed our own mini industry portfolios11 of some of Nike's biggest competitors and ran regressions against that. Lastly, we ran a few of Nike’s biggest competitors against the market to see how they are performing in comparison. The 3-month Treasury Bill rate and the 10-year Treasury Bond rates were computed for the same time span and used as the risk free rates12. In total we ran over 20 regressions. There were 7 variations each ran above the 3-month risk free rate and the 10-year risk free rate (although we did not think there would be significant difference). Comparing the alpha-hats and beta-hats between the variations, there was not a notable difference. With that being said, we decided to choose one style of regression to really focus on and analyze. We wanted to use a regression that includes a risk free rate — in accordance with the CAPM and to get correct beta-hats and alpha-hats—so we picked the regressions using the 3-mo rate to focus in on just to keep things consistent.

NKE Regressions:

NKE.SP500 Coefficients Standard Error t Stat P-value Confidence Alpha hat 0.008382 0.004311 1.944339 0.053431 0.946569 Beta hat 0.828841 0.088711 -1.929404 0.055271 0.944729

We first tested Nike’s performance against the market using the S&P500. In other areas of analysis for Nike we have been looking at the history dating back to the beginning of 2001 so we ran this regression with the last 180 months of data. The regression reported an annualized α=0.101 and a β=0.8288. Getting an alpha-hat greater than 0 is an indicator that our stock, on average, is rewarded for idiosyncratic risk at 10.1% per year the last 15 years. We also conducted a two tail hypothesis test to be sure our alpha-hat was statistically significantly different than zero, proving Nike is beating the market. With a p-value of .05343 we are able to say with 94.6% confidence that alpha-hat is statistically different than 0. We were not too surprised by the fact that Nike has been rewarded for idiosyncratic risk as the company has seen substantial growth and success in recent years. This fact also made the output of beta-hat less than one seem very reasonable. Our beta-hat, being lower than the market value of β=1 tells us that there is less volatility associated with our stock than the volatility associated with the market. Again, with Nike’s growth and stability being so constant it is understandable that its stock would have

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relatively low variation from the mean. This doesn’t indicate that Nike is necessarily performing better or worse than the market, just that it is moving around less when compared to the market.

60-month Interval data:

We also ran regressions using the same X and Y variable but in three 60 month intervals to see how Nike’s alpha-hats and beta-hats changed over time (above is the most recent 60 months). From doing do, we saw a continuous growth in their alpha-hat, meaning Nike has been increasingly rewarded for idiosyncratic risk in their returns. Specifically, the beta-hat of the most recent 60 months is more than 80% greater than that of the 60 months beginning in 2001. This growth is substantial and not maintainable in the long run, but we do believe Nike is still a growing company that will continue to generate growing positive alpha-hats in the coming years. The most recent annualized alpha-hat of 0.16476 has an associated p-value of .08333. So while the p-value>0.05 we are still 91.7% confident it is statistically different than 0. Investors of Nike have been rewarded for bearing Idiosyncratic Risk on average by 16.5% per year the last five years. Furthermore, in December 2015 Nike was hindered by idiosyncratic risk. Calculating the idiosyncratic return for this month resulted in a -3.98% return for holding idiosyncratic return (alpha hat = 1.436% + epsilon hat for December -5.417%). The segmented regressions also report all three beta-hats below the market value of 1 with the most recent months giving the lowest beta-hat of 0.6226. However, the two older regressions have fairly high p-values that don’t lead us to believe the beta-hats are significantly different than 1. The p-value associated with the beta-hat from the past 60 months is .09600 giving us 90.4% confidence that the beta-hat is significantly different than 1. While this level of confidence is not great, we will accept being 90% confident which makes us think that for the most part Nike has seen less volatility than the market in the past 5 years. Overall it appears Nike is currently experiencing its best performance over the past 15 years and if the trend continues like we believe it will, they should expect even better performance measures.

Other Market Benchmarks:

Monthly Returns NKE.RUA Coefficients Standard Error t Stat P-value Confidence

alpha-hat 0.014769 0.007694 1.919517 0.059843 0.940157 beta-hat 0.622764 0.223291 -1.68944 0.096504 0.903496

Monthly Returns NKE.DJIA Coefficients Standard Error t Stat P-value Confidence

alpha-hat 0.015514 0.007663 2.024621 0.047519 0.952481 beta-hat 0.635243 0.23304 -1.56521 0.122974 0.877026

Monthly Returns

NKE.SP500 Coefficients Standard

Error t Stat P-value Confidence alpha-hat 0.013726 0.007790 1.762064 0.083328 0.916672 beta-hat 0.622577 0.223048 -1.692119 0.095990 0.904010

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In addition to using the S&P500 as the market representation, we ran regressions of Nike against the DJIA and RUA. For these, we decided to stick to the most recent 60 months of data as we feel that is the most relevant and accurate measure of Nike's performance. Again, we ran 2 regressions for each – using the 3-month rate and the 10-year rate. Focusing on the regressions above the three month rates, we saw very similar alpha-hats and beta-hats in all 3 market representations. The three annualized alpha-hats associated with the S&P500, RUA, and DJIA were 0.16476, 0.17724, and 0.18612 respectively. The 2 new alpha-hats also have lower p-values, increasing our confidence in the fact that Nike is outperforming the market and on average is rewarded for bearing idiosyncratic risk, as we were predicting when looking just at the S&P500. As seen in the outputs above, each regression gave us very similar values for beta-hat, all between 0.6226 and 0.6352. However, none of these beta-hats resulted in p-values<0.05. Our confidence in the beta-hat being different than 1 is not alarmingly low, however our least confident level is 87.7%. With the 3 tests ran, we stick with our previously described reasoning of Nike being less volatile than the market, on average.

Industry Portfolios against the Market: The portfolios we constructed include only 5 and 9 firms, all of varying sizes. We are aware that they are not fully representative of the entire industries, but include the main competitors of the industry. Even though our regressions and analysis include these limitations, we believe we are still able to gain insight on the general performance of each industry in comparison to the market.

The first portfolio we built was footwear focused and includes the companies of Deckers, Steve Madden, Crocs, Sketchers, and Nike. Although it only consists of 5 firms, we believe the regression will give us an estimate of how the footwear industry is performing in comparison to the market. The portfolio was equally weighted between the five firms using each company's respective IRR's above the 3-month risk free rate. Running the most recent 60 months of data, we received an annualized alpha-hat and beta-hat of -0.21024 and 0.7054 respectively. The alpha-hat, which we are 96.4% confident is statistically different than 0, based on a p-value of 0.0480, tells us the footwear portfolio has negatively been affected for idiosyncratic risk by about 21% per year the last 5 years. Nike alone tends to be rewarded for idiosyncratic risk by 16.5% per year, therefore breaking industry trends. This entails that Nike is not only beating the market, but its competitors as well. A two tailed hypothesis test testing if the beta-hat is statistically different than 1 gave a p-value of .2126. From this we don’t have enough confidence to claim there is any statistical difference if the portfolio is more or less volatile than the market.

Monthly Returns APP.SP500 Coefficients Standard Error t Stat P-value Confidence

alpha 0.004749 0.005417 0.876694 0.386162 0.613838 beta 0.746981 0.173622 -1.4573 0.153249 0.846751

Monthly Returns FW.SP500 Coefficients Standard Error t Stat P-value Confidence

alpha -0.01752 0.008165 -2.14586 0.036081 0.963919 beta 0.705357 0.233785 -1.26031 0.212603 0.787397

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Because Nike has expanded its product line so much, we thought it would be fitting to include it in a portfolio not solely focused on shoes. The second portfolio was built to represent companies like Nike who manufacture and sell athletic shoes but compete in the apparel industry as well. The companies we picked to go with Nike were Adidas, Under Armour, Asics, and Puma. Again we subtracted off the 3-month T-bill rate from each monthly IRR. Unfortunately, the companies in this portfolio are all fairly new to the market preventing us from pulling 60 months’ worth of historical prices for each company. Asics for example just went public a year ago so we only have IRRs for 13 months. We thought that was too short of a time span to run a regression so we built the portfolio back to the next newest company, Puma, with 40 months of data. In order to account for Asics’s lack of data, the portfolio returns of the first 13 months consist of an equal weighting (1/5) of all five companies mentioned above, and then the next 27 months use an equal weighting (1/4) for the four companies without Asics. Our regression therefore ran the past 40 months of the portfolio returns against the 40 months of S&P500 returns, giving us an annualized alpha-hat and beta-hat of 0.05699 and 0.7470 respectively. The alpha-hat insinuates that the portfolio returns about 5.7% on average per year for holding idiosyncratic risk, but a two tailed hypothesis test gives us a high p-value of 0.3861 not allowing us to confirm that α≠1. Our beta-hat from this regression, 0.7470 can be deemed significantly different than 1 with 84.7% confidence. Like we saw in Nike’s regression against the market, it appears this portfolio has less volatility than the market. In this case, Nike is acting in accordance with its competition and displaying similar habits.

Monthly Returns COMBO.SP500 Coefficients Standard Error t Stat P-value Confidence alpha 0.003385 0.006483 0.522167 0.604585 0.395415 beta 0.731762 0.207787 -1.29093 0.204527 0.795473

A third portfolio was built by simply weighing the Footwear and Apparel portfolios equally giving us a 9 company portfolio consisting of Nike and its biggest and most prevalent competition. We removed Nike from the apparel portfolio before running the regression so it wasn’t double weighted. This portfolio could also only run regressions using the past 40 months of data we were restricted to because of the apparel based portfolio. The annualized alpha-hat was 0.04062 but had no statistical difference than 0 due to its high p-value of 0.6046. Therefore, not much can be said about how these companies compare to the market. The beta-hat of 0.7318 also had no statistical difference than 1 as its p-value was 0.2045. The insignificant results may be due to the fact that although the footwear and apparel industries seem closely related, there are a multitude of factors that differentiate them. This probably lead to some of the vague data resulted here. It could, however, solidify the idea that companies in the same industry often act similarly, as seen in the other two portfolios, while different industries have different behaviors.

Competitors against the market: For the last of our regressions, we decided to run a couple of the companies we had included in our portfolios against the market to see how their alpha-hats and beta-hats compared to Nike. This provides us with another benchmark when trying to figure out how Nike’s performance compares to other firms and to the market in general. The two companies we picked to do this are Deckers and Adidas. They were chosen because we feel both are well matched to Nike in terms of being large, well established companies that face many of the same risks and

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opportunities. These similarities make it easier to compare the regression values as the numbers are relevant to each other. For these regressions we used the most recent 60 months of data and the DJIA as the market. The 3-month Treasury bill was used as the risk free rate that was subtracted off.

Monthly Returns DECK.DJIA Coefficients Standard Error t Stat P-value Confidence alpha -0.00616 0.017357 -0.35463 0.724156 0.275844 beta 0.834208 0.527868 -0.31408 0.754589 0.245411

The regression of Decker’s against the Dow returns the above output. A negative alpha-hat (annualized -0.0739) indicates idiosyncratic risk has pulled the stock down by 7.4% on average the last 5 years and a beta-hat less than one indicates less volatility than the market. However, if you look to their p-values, they exceed .05 immensely proving no statistical difference in the alpha-hat against 0 or the beta-hat against 1. Our low confidence in these measures comparing Deckers to the market means these estimated alphas and betas really aren’t indicative of much. Decker’s appears to be underperforming by about 7.4% per year, but this high standard error and high p-value means it probably sees months of underperformance more frequently than months of outperformance, but not by much. This kind of trend is probably true of the beta as well in that it is more commonly less volatile than the market, but also has times when it fluctuates around its mean more than the market. When comparing these results to those of Nike against the DJIA, Nike appears to be performing at higher rates. We can confirm statistical difference of Nike’s annualized alpha-hat of 0.1861 with 94.25% confidence. The beta-hats between companies aren’t as relevant in this case but the alpha-hats show quite clearly that Nike is outperforming both Decker’s and the market.

Monthly Returns ADDY.DJIA Coefficients Standard Error t Stat P-value Confidence alpha 0.000697 0.007941 0.087787 0.930348 0.069652 beta 1.42221 0.24152 1.748135 0.085732 0.914268

The regression of Adidas against the market gives us strong information about their beta hat but little insight in terms of alpha hat. The beta-hat of 1.4222 implies that Adidas has higher volatility than the market on average. The p-value is greater than 0.05 but we are still 91.4% confident in this result and its implications. The alpha-hat on the other hand is coupled with an extremely high p-value of 0.9303 meaning we cannot prove statistical difference between its annual value of 0.00836 and 0. Because of our lack of confidence in Adidas’s ability to outperform the market, we came to the conclusion that Nike is also outperforming Adidas based on the alpha hat reported in the regression output above.

Sales Growth Analysis To model our sales growth and forecast the growth over the next five years, we looked at many macro data factors Nike themselves have stated in past 10k’s as possible believed sales drivers as well as other macroeconomic factors we believe have an effect on sales growth. Using monthly data from 2001 we calculated the quarterly growth rate of revenues for the past 57 quarters as well as the quarterly macroeconomic numbers, spanning the first quarter in 2002 (6/1/01-

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8/31/01) to the first quarter in 2016 (6/1/15-8/31/15). Using quarterly data increases the amount of observations in our model, enabling our regression to have a more accurate R-squared, and allows us to test for seasonality. In total we think there are potentially 15 main drivers behind Nike’s sales growth.

Factors Tested: This paragraph summarizes the factors we initially came up with as potential influences on Nike's Sales. We calculated the quarterly inflation rate from the Consumer Price index for all quarters in our period, however this factor increased the amount of error in our regression so we decided to run all numbers in nominal terms. The next two factors we used were interest rates, both short term and long term. We use the annualized 3-month Treasury Bill interest rates on a quarterly basis as well as the annualized 10-year Treasury Note interest rates on a quarterly basis. Interest rates often affect the purchasing decisions by businesses and consumers, therefore we believe declining rates will improve sales growth. Being a global company, Nike does nearly a quarter of its annual sales in Europe, so we think the growth rate of European GDP has a positive effect on total sales. Similarly, we believe an increase in U.S. GDP growth rate will increase sales. Another factor tested is the U.S. unemployment growth. We calculated the growth in the unemployment rate for each quarter and expect an increase in unemployment to hurt sales as it indicates how well the economy is doing. From Nike’s 10k, we expect increased prices of petroleum extracts, rubber, and cotton prices to affect our sales. Increases in raw material prices trickle down the supply chain leading to increased production costs and selling prices. Because of this, we expect a negative relation between the prices of oil, rubber, and cotton, and sales growth. Additionally, sales are affected by events such as the Olympics and World Cup. We expect a positive correlation between sales growth the quarters these events occur. Nike also states it has stronger sales, historically, during the 1st and 4th quarters so we expect a positive relation between the 1st and 4th quarters and sales growth.

Main Drivers:

As the national GDP level rises we expect overall sales to increase. The numbers we were able to obtain were only quarterly data of typical quarters, January to March, April to June, etc. Because of this we shifted the quarterly growth rates one month to fit into Nike’s quarters, and since we are measuring the growth rates rather than the actual GDP level, we do not think this shift will largely affect our data. We think an increase in overall GDP will boost sales, therefore having an increase in GDP growth rate will have a positive effect on sales.

Similar to GDP, we are using the growth rate of Disposable Personal Income. We believe this is a direct correlation to sales growth. As disposable personal income increases and consumers have more money, we expect sales to increase therefore showing a positive relation between the two.

Nike does a large amount of its sales in North America, roughly 45 percent, however it also does sales globally. About 23 percent of sales come from Europe and 10 percent from China. We think the exchange rate between the Euro/Dollar and the Yuan/Dollar will have an effect on sales growth. If the dollar is weak relative to the Euro or Yuan, then US exports are aided. Therefore,

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we expect to see positive impacts on growth when the dollar is weak and lower sales when the dollar is strong, or said differently, a negative relation between the Euro/ Dollar exchange rate and Nike’s sales growth, as well as a negative relation between the Yuan/Dollar exchange rate and Nike’s sales growth.

Regression Results: The sales model regression tests Beta Hat’s significance from zero on the sales model. We ran one-tailed tests for each variable since we have a strong prior belief how each variable should affect sales. For variables we expect to be negatively correlated to sales growth, we expect a negative Beta Hat, and for variables positively affecting sales growth, a positive Beta Hat.

One of the Regressions for potential sales growth is displayed below.

Regression Statistics

Multiple R 0.7621

R Square 0.5808

Adjusted R Square 0.4665

Standard Error 0.0611

Observations 57

Coefficients Standard Error t Stat P-value

Intercept 0.0309 0.2400 0.1288 0.8981

GDP Growth 1.8322 1.7827 1.0278 0.1548

Euro GDP growth 1.3156 1.8343 0.7172 0.2385

3mo T-bill -0.4403 0.9618 -0.4577 0.3247

10yr T-note 0.9467 2.0047 0.4722 0.6805

Growth of DPI 2.1364 1.2414 1.7209 0.0461

Unemployment growth 0.1285 0.2073 0.6198 0.7307

Euro/Dollar -0.0712 0.1164 -0.6115 0.2720

Yuan/Dollar -0.0121 0.0289 -0.4202 0.3382

Crude Oil -0.0002 0.0008 -0.3195 0.3754

Rubber Prices 0.0002 0.0002 0.8039 0.7871

Olympics 0.0329 0.0261 1.2631 0.1066

Quarter influence 0.1110 0.0169 6.5830 0.0000

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The regression above tested 12 variables and resulted in an adjusted R-squared of .4665. Notice variables 10yr T-note IRR, Unemployment growth, and Rubber Prices have the wrong sign for beta, and thus have a high P-value. A number of the variables have high p-values as well so we discard those in the following regressions to get a more accurate sales model.

7 Variable Regression:

Regression Statistics

Multiple R 0.7521

R Square 0.5657

Adjusted R Square 0.5037

Standard Error 0.0590

Observations 57.0000

Coefficients Standard

Error t Stat P-value

Intercept -0.0042 0.0562 -0.0756 0.9400

GDP Growth 1.3222 1.4707 0.8990 0.1865

Euro GDP growth 1.0842 1.7051 0.6358 0.2639

3mo T-bill -0.3647 0.5662 -0.6440 0.2613

Growth of DPI 2.0717 1.0673 1.9411 0.0290

Euro/Dollar -0.0817 0.0697 -1.1721 0.1234

Olympics 0.0316 0.0241 1.3127 0.0977

Quarter influence 0.1112 0.0158 7.0553 0.0000

The regression above tested 7 variables and yielded an adjusted R-squared of .5037. While this regression is better than before, and all variables have the correct sign for Beta Hat, the p-values for Euro GDP growth and the 3mo T-bill are a tad too high. We are aiming for confidence levels around 85% and higher. This is adjusted in the next regression.

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Most Accurate Regression:

Regression Statistics

Multiple R 0.7488

R Square 0.5607

Adjusted R Square 0.5177

Standard Error 0.0581

Observations 57.0000

Coefficients Standard

Error t Stat P-value

Intercept -0.0102 0.0543 -0.1874 0.8521

GDP Growth 1.8893 1.1597 1.6292 0.0547

Growth of DPI 2.0459 1.0140 2.0177 0.0245

Euro/Dollar -0.0787 0.0674 -1.1682 0.1241

Olympics 0.0316 0.0237 1.3312 0.0945

Quarter influence 0.1115 0.0155 7.1786 0.0000

After the regressions were ran with 15 different variables, we ended up with a sales model containing 5 macro variables significantly affecting the sales growth of NKE13. The regression above best models Nike’s sales and will be used to forecast sales growth. These variables are nominal GDP Growth, Disposable Personal Income Growth, Euro/Dollar ratio, the Olympics, and the quarter influence. We yielded an adjusted R squared value of .5177, so about 52% of the variability in sales can be explained by these factors. The p-values are relatively low to the point where we are more than 87% confident each variable affects sales growth. In order to project the sales for the future 5 years, in quarterly adjustments, we will use the data this outputted.

Future projections of the significant variables:

For GDP, DPI, and the Euro/Dollar exchange rate we used the growth in the last 5 years, in quarters, to project the next 5 years. We ran the numbers to calculate the geometric growth rate of each quarter against its previous quarters and averaged out the geometric means to get a rough estimate of what we believe the growth rate per quarter is going to be the next 5 years. We ran these numbers for each GDP, DPI, and the Euro/Dollar exchange rate.

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""13"See"Appendix"5A"for"final"sales"growth"regression"data"

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Quarter: 2016-02-01 2016-05-01 2018-02-01 2018-05-01 2020-11-30 2021-02-28

GDP 18,293 18,460 19,672 19,852 21,740 21,938

Growth in GDP 0.913% 0.913% 0.913% 0.913% 0.913% 0.913%

The average GDP growth rate calculated to roughly 0.91% geometric growth each quarter. Using this as a constant growth rate we calculated the next 5 years, in quarterly increments14. In our sales growth model we used the growth of GDP as the variable and kept it at a constant growth rate of 0.913%, and when multiplying by the Beta Hat of GDP effect on sales of 1.89, we believe GDP alone will increase sales by 1.72%. From growing at a constant rate of 0.913% per quarter we expect the national GDP to grow to 21,940, in nominal terms, at the end of February in 2021.

From running the same model for Disposable Personal Income we calculated an average geometric quarterly growth rate of about 0.77%, so we used this number, held at a constant rate, to forecast the rates of the disposable personal income the next 5 years15. This factor multiplied by the Beta Hat growth rate of DPI on sales growth of 2.046 itself explains a sales growth of 1.56% per quarter. From this constant growth rate, we expect the disposable personal income level to climb to 16,011, in nominal terms, by the end of February 2021.

From running the same model for the Euro/Dollar exchange rate we got an average geometric quarterly growth rate of 1.05%, however, we do not think this is a reasonable futuristic growth rate, but rather a slightly smaller rate might be more reasonable. We used a growth rate of 1.00% for the Euro/Dollar exchange rate for the periods February 2016 through May 201816. Looking at projections, Long Forecast projects the positive growth rate to pull back slightly in mid-2018, so we adjusted our growth rate to -0.95% from August 2018 through May 2019, a course of four quarters, to adjust for a correction we believe will take place in the exchange rate. After mid 2019 we think the exchange rate will return to the growth rate of 1.00% for the ensuing quarters, as we had before. These growth rate numbers see a peak in the Euro/Dollar exchange rate of .998 at the end of May 2018, a pullback to .960 at the end of May 2019, and then climb back to a rate of 1.03 at the end of February 2021. Since we expect this rate to negatively impact Nike’s sales, the Beta Hat on exchange rate has an impact on sales growth of -.078. The exchange rate hurts sales growth the most in the quarter ending February 2021 with an impact of -8.11% and hurts sales the least in the quarter ending February 2016 with a forecasted impact of -7.18%.

Nike is a leading brand when it comes to the Olympics so we decided to run numbers on how much the Olympics have an effect on sales growth. The Olympics happen every 4 years, occurring in Nike’s quarter 1 for summer and quarter 3 for winter, so we are able to forecast with certainty when the Olympics will occur. The projected growth of sales due to the Olympics resulted in a positive Beta Hat of 0.0316 indicating sales growth is positively impacted at a rate of 3.16% during each quarter the Olympics takes place.

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""14"See"Appendix"5B"for"calculated"GDP"growth"rates"15"See"Appendix"5C"for"DPI"growth"rate"calculations"16"See"Appendix"5D"for"Euro/Dollar"exchange"growth"rate"calculations"

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Additionally, Nike stated sales are higher in quarters 1 and 4, so this too is easily forecasted. These are the spring and summer months spanning March to September. These spring and summer months have a big influence on sales growth with a Beta Hat of 0.111, meaning the first and fourth quarters impact sales growth at a rate of 11.1%.

Forecast of Sales: Quarter Beta Hat 8/31/16 2/28/21

GDP Growth 1.8893 0.009126469 0.0091

Growth of DPI 2.0459 0.007744272 0.0077

Euro/Dollar -0.0787 0.930508337 1.0299

Olympics 0.0316 1 0

Quarter influence 0.1115 1 0

Quarterly Growth of Revenue 10.29% -4.80%

From these regressions and calculations17, we forecast the smallest sales growth in the 3rd quarter ending in February 2021 of -4.8% due to a high Euro/Dollar exchange rate, an off year for Olympics, and not one of the strong sales quarters (1st or 4th). On the other hand, the strongest growth rate forecasted occurs in the first quarter of 2016 ending in August of 2016. We have this quarter’s sales growing at 10.3%, due to a lower Euro/Dollar exchange rate, the 2016 Summer Olympics, and being in the first quarter.

Annual sales:

Year 5/31/15 5/31/16 5/31/17 5/31/18 5/31/19 5/31/20

Annual Revenue (in thousands) $30,601,000 $31,409,535 $33,730,514 $35,821,745 $37,877,934 $39,502,007

Annual Growth 10.08% 2.64% 7.39% 6.20% 5.74% 4.29%

From this sales growth model we forecasted the sales to grow from $30.5 billion in 2015 to $39.5 billion by 2020. Nike’s CEO Mark Parker has recently made public comments of setting a goal of total sales reaching $50 billion by 2020, roughly an increase in total revenue of 63%. However, barring any surprises, we believe a more realistic increase in total revenue will be about 30%, from $30.6 billion in 2015 to $39.5 billion in 2020.

Depreciation Waterfall Constructing the schedules: In order to construct the depreciation waterfall for a company as complex as Nike, we broke down depreciable assets into simple categories. We chose to divide it into buildings, leasehold improvements, and equipment-which was further divided into 5, 7, and 15-year equipment subcategories, for a total of five fully constructed depreciation schedules. For each of the 5 asset

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""17"See"Appendix"5E"for"all"quarterly"revenue"growth"results"

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categories we assigned a salvage value of 0 for all assets. In addition, we assumed they scrapped everything rather than selling it at the end of its useful life, realistically thinking these numbers will be so small it will have little impact on the company overall. The next step was determining how much of each category would be purchased by Nike each year. By combining data from the income statement, information from historical 10-K's, the internet and our best judgment we were able to come up with our best estimates.

For building purchases18, our numbers relied heavily on property disclosures by Nike through their annual 10-K's. In these reports, we were able to see how many retail stores, sales/admin offices and other buildings Nike operated in a given year. After sifting through all the 10-K's we had available (2015-1989), we tallied up the numbers of each type of building that was purchased each year as well as the net change in buildings from year to year. Concurrently, we looked at the numbers comprising the asset account for buildings each year and compared these numbers to the data on building purchases we had compiled. This allowed us to come up with estimates of how much, on average, Nike spends per retail store, distribution center, and so on. The number we came up with was about $750,000 per building, so in any given year that amount was multiplied to the number of added stores and other buildings that year. This gave us our final values of purchases per year listed at the top of the depreciation waterfall for buildings. We had to make a few adjustments if they added a larger scale building such as a distribution center, which would cost more than a retail store or sales office, but this happened rarely. Nike leases almost every building they use and operate, so sale of buildings wasn’t a concern. In addition, in their 10-K's it says all leases end at various dates in the year 2033 so we assumed the time to hold for each purchase was 2033 subtracted the year in which it was purchased.

When determining purchases per year of leasehold improvements19, we used a lot of the same data pulled from the 10-K that was used for our building computations. Because they lease virtually every building they use, we can assume the improvements will be going towards almost every building. In addition, we examined the Leasehold Improvement account from the balance sheet as well as statistics from the web to give us rough estimates of the costs. We found a couple of really helpful articles from sites like SFGate and HughesMarino which discussed the different types of leasehold improvements and the cost of each per square foot. A study from Statista reported the average square footage of Nike retail stores of 15,000 which gave us some more benchmarks as we chose our numbers. We also estimated the square footage of other building types in Nike's possession to account for non-retail store leasehold improvements and summed those numbers up to get our final totals. By combining this data, we were able to get some numbers we thought were appropriate: $350,000 per retail store, $50,000 per office building, and $500,000 per distribution center. To get our purchases per year totals, we took these numbers and multiplied them by the number of buildings added that year of each respective type. Leasehold Improvements were depreciated over a 15-year life with a salvage value of 0.

The machinery and equipment was the most intricate category for our overall depreciation waterfall. We decided to separate equipment purchases into a 5-year category20 for computers

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""18"See"Appendix"6A"for"a"portion"of"the"Buildings"Waterfall"19"See"Appendix"6B"for"a"portion"of"the"Lease"Hold"Improvements"Waterfall"20"See"Appendix"6C"for"a"portion"of"the"5Yyear"Equipment"Waterfall"

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and information systems, a 7-year category21 for office furniture/fixtures and small equipment, and a 15-year category22 for heavy machinery. Again, we used the data on the number of buildings they owned as we figured any machinery and equipment purchased has to go in a building somewhere. The internet was utilized to pull numbers and get a general idea about the typical types and costs of equipment necessary for a retail store or an office building or a distribution center. For all three equipment categories, we attributed costs to each building added that year (as reported on the 10-K). For example, from our research we decided a new retail store would need $65,000 of 5-year equipment, $100,000 of 7-year equipment and no 15-year equipment. We then multiplied these costs to the number of retail stores added that year. After doing this for each building type in every year, we organized the numbers by equipment class and summed the numbers in order to represent the total purchases for that year.

This approach worked fairly well for 5 and 7-year equipment but was a little more complicated when tackling the 15-year equipment. This type of heavy, industrial machinery is not likely to be found in retail shops or sales and admin offices or many of the buildings Nike talks about operating. Also it is rare that they add a new distribution center to their business. Because of this we weren’t able to multiply the typical costs of 15-year machinery to a number of distribution center increases and found this approach gave us $0 for the 15-year equipment purchases per year in almost every year. We really liked our numbers for the 5 and 7 year categories so stuck with the just discussed methods for those two categories, but went back to the drawing board for 15-year equipment. Ultimately, we decided to make a general assumption that this type of equipment was least prominent in Nike’s business practices. This assumption comes from the fact that they outsource all manufacturing, meaning no purchases of heavy manufacturing machinery, and that the lack of new distribution centers means most purchases in this category are probably due to replacing old machines. In any given year, we estimated the amount of 15-year equipment purchased was just 15% of equipment and machinery from that year as reported on their financials.

In hopes of accounting for equipment, prior to our 1990 start, that Nike already owned but would eventually have to replace at the end of its useful life, we added in additional costs each year to the numbers we calculated above. To get these additional costs we took the number in the equipment account from 1989 and decided that 45%, 40%, and 15% was due to 5-year, 7-year, and 15-year equipment respectively. We further assumed that on average, either 1/5, 1/7, or 1/15 of each categories respective percent would have to be replaced each year, dependent on the equipment’s useful life. For example, for 7-year equipment we took the 40% of the 1989 account balance of equipment and multiplied that by 1/7. By adding a little extra each year, we were able to account for the replacement purchases being made because our strategy really focused on the equipment required to startup a new store or office and not purchases made just to maintain older buildings and operations.

Comparing numbers: After figuring out how we wanted to price and depreciate Nike's asset purchases we then had to input our numbers for purchases per year into each of the 5 waterfalls. We had already built an Excel workbook with 5 sheets containing a waterfall for each asset category. These already had the formulas typed in the cells and the correct format set up so as we inputted our number we """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""21"See"Appendix"6D"for"a"portion"of"the"7Yyear"Equipment"Waterfall"22"See"Appendix"6E"for"a"portion"of"the"15Yyear"Equipment"Waterfall"

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were able to instantly see the effects on depreciation and net PPE. The numbers from each waterfall alone don’t tell us much so we made a sixth sheet that took the sum of accumulated depreciation from each sheet as well as depreciation per year from each sheet. We then copied in the values of these categories that we had pulled from Mergent as part of their financial statements and calculated the percentage error between our values and theirs.

The errors begin very high with -72.94% error in our first year of 1990, but quickly drop with a 13.43% error in 1994 that no subsequent years surpass23. While we built our depreciation waterfalls back to 1990, our time span of analysis for Nike only goes back to 2001 so we focused on our percentages from 2001-2015 to gage the accuracy of our estimations. In doing so we found that our accumulated depreciation matched up with low error to the actual levels of accumulated depreciation experienced by Nike. In this time span, out largest rate was in the earliest year, 2001, with an error of 10.84%. The rates stayed below this in the next 15 years which is important because having less of an error in recent years means we can better project the near future and be more confident in the accuracy of our predictions. On average, our percent error per year (2001-2015) was -2.35%. In addition, 2/3 of our accumulated depreciation totals in the past 15 years were within 3% error of the totals reported on Nike's balance sheet. With these low error rates and our forecasts of the next 5 years being calculated the same way as the historical depreciation, we believe our projections have the potential to align well with what is to come for Nike and produce similar low rates of error when these numbers are reported.

Projecting:

After calculating the purchases per year for each asset class and checking the results with Nike's reported data in terms of percent error, we had to project purchases for the next 5 years. We did so by finding how much PPE Nike would require at maximum capacity and then used the percent of capacity utilization they would be operating at in future years to see how much net PPE was required at that level of output. The first projection we needed was capacity utilization of the next 5 years. The Federal Reserve’s Fred series had rates of the historical capacity utilization that the apparel and leather goods industry has been running at. Monthly data since 2010 shows that capacity utilization rates in this industry have bounced around but stayed within 60-70%. Therefore, our projections were also numbers in this range that didn’t necessarily follow an upward or downward trend. With 5 years of projected capacity utilization and our projected revenues for the same years we were able to calculate the net PPE required for our maximum sales level.

2016 2017 2018 2019 2020 Cap Utilization 62% 67% 66% 68% 65% Max Sales at Full Capacity: $50,660,540.84 $50,269,022.20 $54,193,260.40 $55,867,159.40 $60,772,318.33 Expected Revenue $31,409,535.32 $33,730,513.90 $35,821,745.12 $37,877,934.07 $39,502,006.92 Net PPE req for Max Sales $4,597,734.65 $4,711,343.54 $4,880,383.97 $5,095,894.50 $5,565,915.74

The net PPE numbers were totals for the whole year so we had to break them down into our 5 depreciation categories so we had numbers to put in each individual depreciation schedule. We used proportions to decide how much of the total net PPE belonged to which asset class. These proportions came from building ratios of Net PPE of each asset class to total net PPE in every """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""23"See"Appendix"6F"for"Depreciation"Error"numbers"

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past year. We took the average of the years from 2009-2015, as more historical years don’t have much effect any more, and came up with 15.2%, 11.9%, 4.94%, 11.7%, and 56.3% for buildings, leasehold improvements, 5-year, 7-year, and 15-year equipment respectively24. Now, with net PPE amounts for each category for the years 2016-2020 we could obtain purchases per year in each of the 5 waterfalls by goal seeking purchases per year by setting net PPE equal to their respective values. This completed our depreciation waterfalls and allowed us to transfer the forecasted data into our financial statements and continue building that for the years to come.

Analysis of the forecasted numbers:

It’s impossible to know the accuracy of our projections of asset purchases because Nike doesn’t disclose any purchases of PPE in the categorized asset class technique like we did; benchmarking for this was rather tricky. What we do know, as mentioned before, is that the purchases per year we calculated for each category, when inputted into our waterfalls, gave us values of accumulated depreciation that when summed had small percentages of error from Nikes reported accumulated depreciation. Our calculated purchases from 2016-2020 look very similar to the purchase amounts and trends of growth for the 5 years prior. We can only assume that if our estimations in those past 5 years had low error rates, that our future 5 years will also yield similar rates. When looking at the error between purchases per year from our depreciation schedules and their cash flows, our error rates continuously decline, on average, from 2001-2015 with especially low rates of error in recent history.

2013 2014 2015 Our PPE purchases 717719.4714 990560.3657 915023.2943 Actual PPE purchases 636000 880000 963000 % error 12.8490% 12.5637% -4.9820%

2016 2017 2018 2019 2020

Our PPE purchases 750852.9804 943021.8345 849441.9396 949868.5057 1197042.879

With our projected purchases looking similar to what happened in these three years shown above, we think these forecasts have some indication of what’s to come. Looking at the purchases in each individual depreciation schedule, the number looks similar to historical numbers and does not raise any red flags. The one area in which this might not stand true is for our 5-year equipment. Excel’s goal seek function gave us purchase amounts for 2016 and 2017 (137 and 238 million) that seem reasonable when compared to previous years. But in years 2018-2020 goal seek computed values that dipped down below 100 million. Because the 5-year category is computers and other small technologies, it seems that these numbers should grow not decrease because technology is becoming more prominent and essential to the success of a company. Especially with Nikes plans for growth, and commitment to technology development and use, it doesn’t seem likely that they would be decreasing their purchase of this type of equipment. This could be attributed to the fact that we kept the percentages of asset class to total net PPE constant for the 5 projected years when in reality Nike may be needing to increases the """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""24"See"Appendix"6G"for"Total"Net"PPE"calculations"

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purchases of 5-year equipment to keep up with their growth. Overall though, our projections from our depreciation waterfall seem very reasonable and low error rates give us confidence that our numbers are not unlikely in Nikes future.

Driver Calculations and Forecasting COGS/Sales:

From looking at the past 5 years and the averages of COGS to Sales ratio, we believe the ratio for the next five years will follow the same trend. We believe the ratio will be around 54% with slight positive and negative variations over the course of the next five years. To project the ratio in 2016 we calculated a weighted average of the past 5 years and the past 2 years, leaning more heavily on the past two years because these will likely have high influence on the next year. From this calculation we got a ratio of COGS to Sales of 54.5% for 2016. Years 2017 to 2020 were observed in the same fashion and projected accordingly.

SGA costs to sales:

Looking back to 2001 and seeing what percent of sales were due to SGA costs, we picked up on an obvious and constant trend. All the rates were only in 5% error of each other, and this error shrunk to 2% in the most recent 5 years. Therefore, when projecting the next 5 years, it seemed logical to utilize an average. We also wanted to have our projection account for how close in percent the last 5 years have been as a percent of sales because recent history is more likely to have an effect on the coming years. To do so, we used a weighted average that combined the average of the past 15 years with the average of the past 5 years. This put more significance on recent history while taking into account the longer period as well. Because it has been pretty constant for so long we felt this average was a pretty good guess of what is to come for Nike in the future.

Other operating expenses to sales:

We approached the forecasting of other operating expenses to sales by looking at what has happened historically as well. We computed the ratios of expenses to sales from 2001 to 2015 and examined the numbers in hopes of seeing a trend or a common value across the years. After our analysis we concluded the ratios tend to be very small numbers, sometimes even dipping slightly below zero, but there was no upward or downwards trend. Also the rates in the past 5 years looked just about the same as the rates 10-15 years ago. With this information, we calculated an average of the past 15 years and used that as our first forecast and driver for 2016 and then for each subsequent year, we estimated values we thought reasonable based on what has happened in the past.

Short term interest rate:

The short term interest rates have been bouncing around between around 5 and 12 percent in the past 10 years, however, have been higher lately (12.39% in 2015). We think this trend will continue due to Nike employing a more aggressive growth approach and borrowing more money. We forecast the short term interest rates to be 11.4% in 2016 and climbing to as high as 12.1% in 2019. Nike currently has short term debt rating of A1+ from Standard and Poor’s Corporation and P1 from Moody’s Investor Services.

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Long term interest rate:

Due to Nike having excellent long term debt ratings from Standard and Poor’s Corporation and Moody’s Investor Services, AA- and A1 respectively, Nike has a low long term interest rate. Nike currently has two Bond Payables, each with an original principle of $500 million, and two promissory notes due in 2017 and 2018. The rates on the notes are 6.2% and 6.79% and original principles of $40M and $19M respectively. To compute the rate of debt we calculated the weighted average of the original principles and interest rates for each year. After 2018 the average interest rate on these bonds is 2.94%, as the only outstanding long term debts are the two corporate bonds. We believe Nike will incur more long term debt in the near future due to its recent aggressive growth approach, and will be able to borrow at a rate lower than this thanks to good long term debt ratings. Because of the outstanding ratings, we project the long term debt rate beyond 2020 to be at 1.6%.

Tax Rate:

The corporate tax rate in the US for NKE is 35%, however due to other factors such as foreign earnings and deferred charges, the effective income tax rate for Nike historically sits around 25%. To project future tax rates of Nike depends on many unpredictable factors which include the change in revenues in countries with different tax rates, changes in the valuations of deferred tax assets and liabilities, changes in tax laws, tax audits, and the repatriation of non-U.S. earnings. Because many of these factors are unpredictable, we expect the overall tax rate on Nike to be similar to the past years. We used an arbitrary rate of 23.30% for 2016 and variated the rate as high as 25% in 2019 and as low as 23.1% in 2017.

Dividend growth rate and stock buyback:

Since 2010 Nike has increased its dividend payout each year. It alternates roughly between growing at 16.67% and 14.2%. There are reports its next increase will be a 14% increase to $.62 a share per year, so we will keep it at $.62 for 2016 and then grow them by 16% in 2017, and 14% in 2018. After 2018 we think the dividends will be at a level of $.82 a share per year and then will level off and grow at only 8% for 2019 and 2020.

Shares outstanding:

Nike's shares outstanding have seen a gradual decline since 2013 when they initiated a 4 year, 8 billion dollars, stock buyback program. This program, once completed, is being followed up by a bigger 12-billion-dollar buyback program to begin once the first one finishes. Therefore, we expect to see shares outstanding to continue to decline in the coming years. For the number of shares outstanding for 2016 we looked at the current number of 1.35 billion, as reported in their 10-Q, which was lower than the number reported at the end of May 2015 by about 22%. This significant drop made us believe the number that will be reported in May 2016 will be lower than the current number as well. However, we don’t think growth rates this low will continue in the future, rather we think it’s an abnormal number for Nike as they are trying to wrap up the current buyback program by this May in order to initiate the next one. So we projected a 2016 shares outstanding value of 1.25 billion, a -7% change from 1.35 billion and 1/3 of the -22% growth that occurred in the past 3 quarters. Going forward however, we chose growth rates that reflected the rates they had at the start of the first buyback program. During that time, Nike saw annual growth rates of about -2% on average in the number of shares outstanding. We think this is a

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better reflection of what Nike will see in the next 5 years because the new program will start fresh and therefore have a more balanced rate of buyback. Our future shares outstanding growth rates were around 2.5% and 3%, slightly higher than history in order to reflect the increase in the amount of money funding the program

Common stock/paid in capital:

To forecast this, we looked at the relationship between common stock and paid in capital with the number of shares outstanding. For our historical data, we divided CS&PIC by shares outstanding and saw the number has been increasing every year since 2001. We calculated the growth rate of the ratio which bounced around quite a bit year to year, but tended to be a positive rate around 20%. We used another weighted average combining the average of the last 7 years with the average of the last 3 years to help us estimate what will happen in the future. We used the growth rate calculated from the weighted average for 2016 of 16.78% and then continued the averaging technique to get us rates to 2020. The ratio of Common stock to shares outstanding from 2015 was multiplied by one plus the growth rate for 2016 (and repeated until 2020) and then the resulting ratio was multiplied by shares outstanding of that year, which we already projected. This gave us a total for Common stock and paid in capital for each year beginning with 1.25 billion for 2016 and ending with 1.12 billion in 2020.

A/R:

Nike has become more efficient in terms of its average collection period on accounts receivable. Over the past 5 years Nike has grown its efficiency between 5%-6%. We think Nike will continue this trend, however at a slower growth rate, believing this growth rate is not sustainable for much longer. From the calculations we expect Nike to have an average collection period of 38 days in 2016 and decrease to 33 days in 2020.

Inventory:

The days’ inventory turnover driver was derived from the recent trend of days inventory the past 5 years as well as a weighted average. This driver has been consistently around the mid 80’s with no definite positive or negative direction. To forecast the future 5 years of inventory turnover we used a weighted average of the past 5 years and the past 2 years. From these calculations we expect inventory turnover in days to be 86.36 days in 2016 and variate as high as 87.2 in 2020.

A/P:

Similar to the inventory turnover, the accounts payable turnover has no positive or negative direction and has been around 40 days the past five years. We believe a similar trend will occur the next five years so our forecasts use a weighted average of the past 5 years and past 2 years to calculate the accounts payable turnover in days. We forecast the A/P days turnover will be 47.5 days in 2016, peak in 2019 at 48.3 days and a low of 44.62 days in 2017.

Cash to Sales:

Nike historically has kept about 10-15% of its Revenues in cash. More recently however, cash has slightly decreased towards 10% due to an increase in dividend payouts. To forecast Nike’s cash to sales ratio we used a weighted average the past 5 years and past 2 years to come up with the cash to sales ratio for 2016, 10.2%. We did the same weighted averages for the next 4 years as well.

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Other Current Assets to Sales:

For other assets to sales we also took the approach of examining the ratios Nike had had in the past 15 years. From this we could see that the assets to sales ratio was increasing pretty quickly until about 2010/2011 where it reached its highest rates and then dropped a little and has remained relatively flat. In the past 3 years specifically, the most change has been only in hundredths of percentage points—not very significant. We decided to build our percentages for the next 5 years by using a weighted average of the past. We left out the years of rapid growth from 2001-2009 as we believe Nike is past that stage and is more likely to see future growth that is closely aligned with the more recent history. Because of this, we calculated each forecast by taking an average of the past 6 years and added that to an average of the past 3 years and then finally divided that number by two. This resulted in rates based on historical rates but favoring the most recent 3 years in which we saw the rates remain relatively constant getting us 14.7% for 2016 and 14% in 2020. This averaging technique was used for all 5 years.

Intangible Assets:

Intangible assets for Nike primarily consists of trade names and trademarks. Due to a consistent level of intangible assets historically, we believe the intangible asset ratio will stay around the same rate of about 1.8% to sales.

Other Assets to sales:

Similar to intangible assets, recently Nike has a consistent ‘other assets to sales’ ratio of about 5%. Because the rate is fairly constant, we project the other assets to sales ratio to be 5.04% in 2016 and 5.25% in 2020.

P/E ratio:

To predict Nikes future P/E ratios, we used a combination of our intuition based on history coupled with the expertise of financial analysts and their predictions. Looking back to 2001 Nike had P/E’s around 20 and then dropped and didn’t see any upwards trend until 2010 when it started increasing quite rapidly from 18.8 in 2010 to 27.5 in 2015. We don’t think Nike will be able to keep up this trend for too much longer and with other factors such as their stock buyback program we think it will increase at least one more year but then pull back a little and begin to level out. Our reasoning for this stems for the fact that the buyback program will cause shares outstanding to decline through 2020 and we believe their earnings will be increasing through this same period as a result, causing an increase in EPS values, the denominator of the P/E ratio. This will act with the stock price to get us our P/E and we think the stock will in general increase but bounce around quite a bit. For 2016, we looked to their current P/E ratio which is 30.1 and decided at the end of the fiscal year in three months, 5/31/16, they will have a similar ratio. We chose 30.1 as our 2016 forecast and then looked at historical growth rates to see how much we think it would decline for 2017 and then again for the rate at which it levels out and sees some positive but little growth. Websites such as Nasdaq and Ycharts have analyst predictions which we searched to see what their take on Nike’s P/E will be. We saw similar predictions of the trends occur with Nikes future P/E ratio, but we have the ratio declining more gradually than analysts seem to be predicting.

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Balancing the balance sheet:

Once we inputted all these drivers25 and predicted values for the balance sheet accounts we had to determine a way to make them balance. Our drivers didn’t get us any projections for notes payable or long term debt so these are the categories we manipulated.

Notes payable had relatively consistent values historically so we decided to project values in the same range to leave one row of data to be changed with Excels goal seek function. We set a cell equal to total assets - total liabilities and equity and asked Excel to set that equal to 0 by changing long term debt. We did this for every year 2016-2020 to get a completed and balanced pro-forma balance sheet.

Proforma Financial Statements:

All of the drivers explained above allowed us to build Nike’s financial statements out 5 more years to 202026. Because the drivers were calculated from historical analysis and the utilization of past trends and growth rates, we came up with projections that we feel are realistic numbers for Nike’s future. Comparing the common size statements for the past 5 years and the forward five years, the percentages look quite similar or reflect the growth that we believe will taking place in Nike’s near future. The one area that has future rates vary quite significantly than historical ones is in their long term debt account. The past 3 years show an average of 6.88% for Long term debt to sales, but the future 3 years average 13.27%. This discrepancy is from balancing the balance sheet. As Nike continues to grow and project all time revenue highs in the new future, they will need to borrow more money to support the growth. Because Nike will be borrowing more money, we adjusted short term debt and long term debt on the balance sheet. Short term debt we project will not change much as typical operations will not require many additional resources. However, we believe Nike will borrow most of the money through long term debt in order to build more facilities, manufacturing centers, and of the like needed to expand the company. Because we think long term debt will rise, the projections seen on the common size balance sheet for long term debt appear quite a bit higher than the numbers Nike has been seeing in the past.

Expected Return Models Two approaches were taken in order to estimate the expected return of Nike. We ran a market model regression in order to get a beta-hat to use in the CAPM27. A Fama French 3 Factor regression28 was also carried out that uses two more factors, size and value, in addition to the market, to run against our stock. From these three factors we subsequently obtained three beta-hats that were then used to calculate another estimate of Nike’s expected return. Both of these regressions were run using 60 months of data29, the most recent from December 2015. We used the same 60 market returns, pulled from the Ken French Dartmouth site, in both models to keep regressions consistent. The market data obtained there already has a one-month treasury bill subtracted off, so for Nike’s returns we subtracted the same one-month risk free rate off, for consistency.

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""25"See"Appendix"7"for"the"drivers"used"26"See"Appendix"8"for"Proforma"Financial"Statements"27"See"Appendix"9A"for"the"CAPM"Regression"Output"and"28"See"Appendix"9B"for"the"FF3"Regression"Output""29"See"Appendix"9C"for"the"data"used"in"both"CAPM"and"FF3"regressions"

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Capital Asset Pricing Model (CAPM): The regression of Nike above the market gave us a beta hat of 0.5949. This had to be multiplied by the expected return of the market minus the risk free rate. We derived the expected return of the market by using the data provided from the same Dartmouth site, going back to 1926. We took two averages using the almost 90 years of monthly data available: one of the market above the one-month treasury bill and one of just the monthly rates of the treasury bill. These averages were averaged again and multiplied by 12, to use for the annual expected return of the market in both the CAPM as well as the Fama French calculations. This rate, 0.1106, was chosen over other possible values of the fair return on the market because we figure if the market has been earning 11.1% on average since 1928, it's likely to perform similarly going forward. The current annual rate of a one-month treasury bill, 0.12%, was used as the risk free rate in the CAPM equation.

E r = 0.0012 + 0.5949 0.1106 − 0.0012 = 0.06637

0 1 = 2. 23%

Plugging in this risk free rate, the expected return of the market, and beta hat, we got an expected annual return for Nike of 0.06637 (6.64%).

Risk levels:

Annualized Risks TR NKE SR NKE IR NKE IR/TR

4.47135% 3.95184% 0.51951% 88.38%

For the same CAPM regression against the market, we calculated the components of Nike’s total risk. We took the variance of the 60 months of returns of Nike and got a total risk of 0.04471. The variance of the 60 epsilon hats, or residuals, associated with this regression was 0.005195, meaning Nike has 0.5195% of idiosyncratic risk. This aligns with the resulting beta-hat (0.781) less than one and confirms Nike has less systematic risk than the market. This means Nike fluctuates around its mean less than the market does around its mean. Idiosyncratic risk was 88.38% of Nike's total risk. While this number is high, it is not abnormally high for a single company. The idiosyncratic risk level indicates the level of risk associated solely to holding Nike stock, while the other 11.62% of risk is attributed to the entire market.

Fama French 3 factor Model: The Fama French, because of its multiple variables, gives 3 different beta-hats to be utilized in the calculation of Nike’s expected return in this model. The beta-hat against the market was 0.6589. This number is similar to the beta-hat returned in the CAPM model with the slight difference being due to the presence of two additional variables in this model. The next two variables specific to the Fama French model are based on a company’s size (SMB) and book to market ratio (HML). The data of these two variables are also provided on the Dartmouth website. A beta-hat of -0.2887 for size and -0.8296 for book to market ratios were the results of the regression. A quick glance at these numbers can indicate the behaviors of our firm. Because the data of size looks at small companies subtracted by big, our negative beta hat tells us Nike acts like a big company while the negative book/market beta-hat indicates that Nike acts as a growth

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stock. However, from running a hypothesis test for both beta-hats in which the null is β=0 and the alternative is β≠0, we can only reject the null in the case of the beta of the book to market (HML).

Coefficients Standard Error t Stat P-value confidence SMB -0.2778 0.362436 -0.76648 0.44661 0.55339 HML -0.82957 0.425336 -1.95039 0.056142 0.943858

With only 55.3% confidence that the beta-hat of size has any indication of its return, we think including it in our calculation is worthless and will give us a rate much lower than what we expect to see from Nike. The low p-value associated with size allows us to reject the null hypothesis and say there is statistical difference between beta-hat and 0. This also affects the indication of behaviors: Nike does act as a growth stock but there’s no convincing evidence as to if it behaves like a big or small company.

We re-ran the Fama French Regression, this time including only 2 variables of the market and HML, and got a new E[r] of 4.03%. After thinking more about our beliefs of Nike’s future behavior and performance, we still feel this expected return is a poor representation of what’s to come. Instead, we decided to use our original Fama French regression, with all three factors, and give a 0% weight to the beta-hat of SMB that represents size. In other words, the beta-hat of SMB will have no effect on the calculation for the E[r] for Nike.

After deciding on our process, the beta-hats were multiplied by the expected return of their respective categories. The process of obtaining the expected return of the market was discussed in the previous section with CAPM, and done the same here. We initially computed an annualized average from all the monthly HML data Fama French dating back to 1926 for the book to market expected return, but after getting our rate, we decided it wasn’t an accurate representation of what’s to come, especially for the next few years.

E[r] HML 1926-now last 60 months Weighted average

Average (annualized) 0.046061 -0.02316 0.032217

From looking at the two averages above, recent history has not followed typical behavior. For the past 90 years, value stocks have beaten growth stock by about 4.61% per year on average, but in the past 5 years, growth stocks have beaten value stocks by 2.31% per year on average. Therefore, by using the 4.61% as the expected return, we feel that Nikes expected return will again be underestimated. Nike, as a growth stock, has been performing extremely well as the more recent data illustrates, and we don’t think this success is going to suddenly stop. We don’t think the former rate is completely irrelevant, but we believe the past 60 months should be considered when computing an expected return of HML. We decided to use a weighted average, 80% towards the average of all 90 years and 20% towards the 5-year average, giving us a final HML expected return of 4.22% per year.

E r = 0.0012 + 0.5949 0.1106 − 0.0012 + −0.8296(.0322) = 0.04655

8 9 = 3. 22%

The same risk free rate of 0.12% used in the CAPM was added to the sum of the products of the beta-hats and expected returns finally reaching an expected annual return of 0.04655 (4.66%) for

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Nike. This is compared to the return of 0.02809 (2.81%) which we got using the Fama French with all three beta hats and expected returns built off simple averages of all the data back to 1926.

Risk Levels:"

The risk levels associated with the Fama French regression were computed in order to better understand what is driving the expected return. We were able to compute Nike's total risk (0.3726%) by calculating the variance of the 60 IRR's corresponding to the months run in the regression. The regression was run to include outputs of the residuals of each of the 60 months. These residuals represent the epsilons of the regression equation so by finding the variance of them all, we could determine the percent of idiosyncratic risk, 0.3057%. And finally, because idiosyncratic risk and systematic risk sum to total risk, we did a simple subtraction to get 0.0669% for systematic risk.

Annualized Risks TR NKE IR NKE SR NKE IR/TR 4.4714% 3.6689% 0.8025% 82.053%

Analyzing the numbers:

FF3 FF3 adj. CAPM Nike E[r] 2.8092% 4.6585% 6.6307%

These two models are both supposed to tell us the Expected return on the stock for our company Nike. The two rates 6.64% (CAPM) and 2.81% (FF3) differ quite significantly in size with the CAPM being 136% larger. This large difference is why we made adjustments to the Fama French calculation getting 4.66%, what we feel is a more accurate estimation of Nike's future return and only 29.7% smaller than the CAPM. When looking at just where the numbers come from, the idea behind the Fama French model seems more reliable as it basically does what the CAPM does and more. However, as we saw with Nike, the two extra factors may end up underestimating or overestimating a stocks return. The adjusted Fama French is the rate we have the most confidence in and was used alongside the CAPM in future calculations instead of the original Fama French rate.

Stock Valuation 3 Statement Discounted Cash Flow The 3 statement Discounted Cash Flow valuation gives us insight on the fair value of Nike stock by using the present value of all future assets less current total liabilities resulting in the present value of equity. To calculate the weighted average cost of capital for years 2016-2020 we used our forecasted numbers from the financial statements to determine the weights of equity and debt, the return on debt, and the tax rate. We used two discount rates in the 3 Statement DCF valuation, the CAPM expected return30 and the Fama French 3 factor model expected return31. Using the fair discount rates of these models (6.63% and 4.46%) we computed the WACC to """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""30"See"Appendix"10A"for"DCF"with"the"CAPM"return"31"See"Appendix"10B"for"DCF"with"the"FF3"return"

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find the fair present value of all future assets. We estimate the WACC beyond 2020 to be a terminal rate of 2.25%. Nike is a top competitor in the footwear and apparel industry and does not have as much potential growth as its competitors such as Under Armour. Because of this competitor growth potential, we believe the competitors will slow Nike’s growth and rate of return. Additionally, Nike’s weight of equity and weight of debt since 2012 have been growing closer towards 50/50. Continuing the trend, in 2020 we have forecasted debt to outweigh equity. A higher level of debt relative to equity lowers the WACC in Nike’s situation. For these two reasons, competitor growth and future debt to equity levels, we estimate the WACC beyond 2020 to be 2.25%.

CAPM E[r] Valuation:

The CAPM fair discount rates resulted in WACC rates of 4.75%, 4.61%, 4.74%, 4.34%, and 4.64% for 2016-2020. Using these numbers calculates a Fair Value of $148.39/share. This calculation states Nike’s current stock price of $61.24 is undervalued by $87.15. However, if we were to change the terminal WACC just marginally, the fair values would change by roughly 10%. For example, using the CAPM fair discount rate, by changing the terminal WACC to 2.0% and 2.5% from 2.25%, changes the fair value of Nike from $148.39 per share to $134.44/sh and $165.61/sh respectively. Projecting the terminal WACC is a crucial factor in determining the fair value of Nike stock.

Fair Value of Stock Per Share: $148.39

Actual Price of Stock: $61.24

Pct Stock Over (Under) Valuation: -58.73%

NPV of the stock per share: $87.15

FF3 E[r] Valuation:

The resulting WACC computed from the FF3 fair discount rate for 2016-2020 are 3.62%, 3.55%, 3.59%, 3.35%, and 3.52%. Using these rates and the rate beyond 2020 of 2.25% resulted in a fair value of $291.46, undervaluing Nike’s current stock price by $230.22.

Fair Value of Stock Per Share: $291.46

Actual Price of Stock: $61.24

Pct Stock Over (Under) Valuation: -78.99%

NPV of the stock per share: $230.22

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Dividend Discount Model Our next valuation method for the fair stock price of Nike is the Dividend Discount Model. For 2016 through 2020 we are able to use our forecasted numbers from the financial statements to obtain the Return on Equity, Payout Ratio, dividends paid, as well as the dividend growth rate.

Year 5/31/16 5/31/17 5/31/18 5/31/19 5/31/20

ROE 0.0407 0.0444 0.0560 0.0460 0.0516

PB 0.7618 0.7035 0.7501 0.6990 0.7164

PO 0.2382 0.2965 0.2499 0.3010 0.2836

Growth 14% 16.67% 14% 8% 8%

We are using the market return on equity (Net income/Market Cap) because we think this is a more accurate return Nike achieves rather than the accounting book value of ROE. The current market ROE of Nike sits around .04. Nike is currently in the middle of a growth stage however, so instead of paying out higher dividends, Nike is plowing more money into the firm to stimulate growth. The payout ratio is currently around .24, but by 2021 we think the growth stage will be complete and Nike will begin to pay more dividends as it becomes more mature. Eventually we believe the payout ratio will increase to .40 even though the growth rate of the dividends from 2019 to 2025 will be around 7-8%. In 2026 we believe Nike will be completely out of the growth stage and will achieve maturity. But, Nike is constantly looking for ways to grow its business, and for this reason we believe they will keep a plowback ratio of .60 in order to keep an adequate cash flow back into the business for growth opportunities. At this point the return on equity will be a constant return of .053 and the payout ratio will be .40, resulting in a terminal dividend growth rate of 3.18%.

Year 5/31/26

ROE 0.053

PB 0.6

PO 0.4

Growth 3.18%

We valued the fair value of Nike’s stock by using both the CAPM fair discount rate32 and the Fama French 3 factor model discount rate33 in the Dividend Discount Model. We do not believe ROE for Nike will be constant at either the CAPM or FF3 fair discount rates. Even though Nike

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""32"See"Appendix"11A"for"DDM"calculations"using"the"CAPM"return"33"See"Appendix"11B"for"DDM"calculations"using"the"FF3"return"

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is currently growing, we believe for the most part the ROE has matured and will be constant at the level of .053. This return falls between the two calculated fair discount rates.

The CAPM fair discount rate of 6.63% resulted in a fair value of Nike’s stock of $28.11/share. The Fama French 3 factor model however, has a lower fair discount rate of 4.66%. Using this discount rate resulted in a fair value of Nike’s stock of $66.81/share. The large discrepancy between to two fair values is due to the gap between the two discount rates. Had these two rates been closer, the fair values would be closer as well.

Comparables Our third and final method of valuation for NKE is Comparables. This method compares certain ratios for Nike compared to companies in the same industry. For this method we used 5 different company’s ratios to compute a competitor average34. The five ratios measured are Price Earnings, Price Earnings by growth, Price per share to sales, Price per share to sales by growth, and Price per share to book value of equity. We believe Nike best behaves similarly to its top competitors, so we used 5 of Nike's top competitors in our model The results from each competitor used is shown below.

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""34"See"Appendix"12"for"Comparables"numbers"and"averages"

0.04

0.05

0.06

0.07

16 17 18 19 20 21 22 23 24 25 26 27 28

Returns

ROE CAPM(E[r] FF3(E[r]

47""

For accuracy purposes, we used the most recent historical data for the calculation of each company’s ratios. We decided using forecasted numbers for each firm would increase our exposure to error and believe the ratios today will be close enough to the future ratios where there will not be a big difference by using today's numbers.

This gave us 5 different fair values of NKE, but we think each ratio has different significance. Since PED and PSG are similar to P/E and P/S, we weight P/E, P/S, and P/B the same weight of 25% and assign lower weights (12.5%) to PEG and PSG since they are partly accounted for already in P/E and P/S. Using these weights resulted in a Comparables fair value of $55.03/Sh.

Final Valuation We now have 5 different Valuation measures for the fair value of NKE. However, we do not believe any one of these is entirely accurate. Instead, we predetermined how confident we thought each model would be in valuing the fair value. We originally liked the fair discount rate from the Fama French 3 Factor Model over the discount rate of the CAPM. We think the additional variables the Fama French Model tests gives us a more accurate expected rate of return since it adjusts for other factors (stock size and value vs growth). Because we are more confident in the FF3 numbers, we decided to give weights of 25% to both of the FF3 valuations. However, we are confident the CAPM valuations are significant, and weigh them only 5% less than Fama French, at a weight of 20%. We are confident in the forecasts of the financial statements and think the 3 Statement Discount Cash Flows provide good value to our total fair value of NKE, so we will weight them at 45%. As noted before, we will weigh the CAPM portion of the 3 Statement DCF 20% and the FF3 25%. Similarly, we are confident our Dividend Discount Model provides equal value to the total valuation of NKE and attribute 45% weight to it as well (20% to CAPM and 25% to FF3). This leaves a weight of 10% for the comparisons model. Although this is another valuation method we have two main problems with this model. The first is it measures the company relative to its industry, and not the stock market as a whole. The industry could be in a bubble overvalued or undervalued, but the comps model does not test this. Our other concern is the size of the industry. The footwear and apparel industries are much larger than the 6 companies we modeled. The different sizes of these companies can skew the data since we constructed such a smaller industry than the entire footwear and apparel industries as a whole. Mainly due to these two reasons, relativity and industry size, we are not very confident in the comparisons model and only weigh it 10%.

Valuation Method Price/Sh Weight Fair Discount Rate

3 Stmt DCF $148.39 20% CAPM

3 Stmt DCF $291.46 25% FF3

DDM $28.11 20% CAPM

DDM $66.81 25% FF3

Comps $55.03 10% -

Fair Value of NKE $130.37

48""

Fair Value of Stock Per Share: $130.37

Actual Price of Stock: $61.24

Pct Stock Over (Under) Valuation: -53.03%

NPV of the stock per share: $69.13

The Fair Value Nike stock is currently $130.37 per share from our analysis. Nike is trading at $61.24 per share as of March 4th 2016. We believe NKE is undervalued by $69.13 and recommend you long Nike stock.

49""

Works Cited http://csimarket.com/stocks/competitionSEG2.php?code=NKE

http://homeguides.sfgate.com/retail-leases-tenant-improvements-48493.html

http://hughesmarino.com/san-diego/blog/2012/02/06/tenant-improvements-a-practical-guide-for-estimating-project-cost/

http://investors.nike.com/investors/news-events-and-reports/investor-news/investor-news-details/2015/NIKE-Inc-Reports-Fiscal-2015-Fourth-Quarter-and-Full-Year-Results/default.aspx

http://longforecast.com/fx/euro-exchange-rate-forecast-for-2015-2016-and-2017.html

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

http://qz.com/365948/nike-is-fighting-three-legal-battles-to-protect-the-brands-design-soul/

http://subscriber.hoovers.com/H/company360/competitiveLandscape.html?companyId=14254000000000&competitorId=92632000000000&competitorId=91292000000000&competitorId=106607000000000

http://subscriber.hoovers.com/H/company360/competitiveLandscape.html?companyId=14254000000000&competitorId=16612000000000&competitorId=57738000000000&competitorId=46258000000000

http://subscriber.hoovers.com/H/company360/fulldescription.html?companyId=92632000000000

http://subscriber.hoovers.com/H/industry360/financials.html?industryId=1164

http://www.mergentonline.com/basicsearch.php

http://www.adidas-group.com/en/group/profile/#/reebok-ccm-hockey-holt-aus-eishockeyspielern-das-beste-heraus/

http://www.athletepromotions.com/nike-endorsements.php

http://www.deckers.com/investors/press-releases/press-detail?releaseid=1834885

http://www.inc.com/articles/201108/business-start-up-costs-retail-store.html

http://www.sportsbusinessdaily.com/Journal/Issues/2015/03/16/Marketing-and-Sponsorship/NFL-Consumer-Products-Summitaspx

http://www.statista.com/statistics/253349/brand-value-of-sports-businesses-worldwide/

http://www.statista.com/statistics/265059/size-of-the-leading-us-outlet-chains/

http://www.usatoday.com/story/sports/nba/cavaliers/2015/12/08/lebron-james-nike-lifetime-deal-500-million/77007118/

https://ycharts.com/financials/NKE/income_statement/annual

50""

Appendix Appendix 1: Altman Z

2009 2010 2011 2012 2013 2014 2015

EBIT / Total Assets 0.152 0.182 0.194 0.196 0.198 0.198 0.211

Sales / Total Assets 1.493 1.374 1.418 1.584 1.532 1.537 1.523

Mkt Value of Equity / Liabilities 5.498 7.037 7.564 9.259 9.302 9.272 10.406

Ret Earns / Total Assets 0.410 0.417 0.404 0.374 0.341 0.292 0.238

Working Cap / Total Assets 0.466 0.508 0.508 0.493 0.525 0.508 0.456

Z Score: 6.423 7.391 7.770 8.899 8.873 8.769 9.340

Appendix 2: DuPont Appendix 2A: Profit Margin graph inputs

2001 2002 2003 2014 2015 2016 2017 2018 2019 2020 Tax Burden Ratio 0.64000 0.65202 0.42208 0.75988 0.77836 0.76779 0.76925 0.76003 0.75018 0.75392 Interest Burden Ratio 0.94011 0.95530 0.96320 0.99077 0.99339 0.98025 0.96713 0.97698 0.96907 0.97126 Operating Profit Margin 0.10329 0.10764 0.10899 0.12867 0.13833 0.13693 0.11776 0.14558 0.12271 0.13088 Profit Margin 0.06215 0.06705 0.04431 0.09687 0.10696 0.10306 0.08761 0.10810 0.08920 0.09584

Appendix 2B: ROE graph inputs

2001 2002 2003 2014 2015 2016 2017 2018 2019 2020 Profit Margin 0.06215 0.06705 0.04431 0.09687 0.10696 0.10306 0.08761 0.10810 0.08920 0.09584 Asset Turnover 1.63049 1.53546 1.59326 1.49505 1.41671 1.35015 1.32824 1.41868 1.32173 1.42885 Equity multiplier 1.66536 1.67830 1.68239 1.71785 1.69985 1.85128 1.97376 1.81806 2.13327 1.87916 ROE 0.16875 0.17278 0.11878 0.24880 0.25757 0.25760 0.22968 0.27882 0.25152 0.25733

Appendix 2C: ROE computations

2015 2016 2017 2018 2019 2020

Tax Burden Ratio 0.7784 0.7678 0.7692 0.7600 0.7502 0.7539

Interest Burden Ratio 0.9934 0.9802 0.9671 0.9770 0.9691 0.9713

Operating Profit Margin 0.1383 0.1369 0.1178 0.1456 0.1227 0.1309

Asset Turnover 1.4167 1.3502 1.3282 1.4187 1.3217 1.4289

Equity multiplier 1.6999 1.8513 1.9738 1.8181 2.1333 1.8792

ROE 25.76% 25.76% 22.97% 27.88% 25.15% 25.73%

51""

Appendix 2D: ROE (Industry Comparisons) graph inputs

12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 Apparel Industry Avg 0.15206 0.15944 0.13249 0.13494 0.13581 Footwear Industry Avg 0.22014 0.18062 0.17059 0.13494 0.13814 Nike 0.21312 0.21858 0.22597 0.23908 0.26437

Appendix 3: Ratios Appendix 3A: Footwear Manufacturing Industry Ratios

Data Period: 2014 Company Size All Large Medium Small Size by Revenue Over $50M $5M -$50M Under $5M Company Count 304 15 42 247 Income Statement Net Sales 100% 100% 100% 100% Gross Margin 32.50% 32.80% 31.70% 32.60% Operating Income 2.10% 2.00% 2.50% 2.60% Net Income 1.00% 0.90% 1.20% 1.30% Balance Sheet Cash 8.70% 8.70% 8.50% 8.40% Accounts Receivable 21.30% 21.30% 21.60% 20.30% Inventory 32.80% 32.70% 33.00% 33.00% Total Current Assets 70.70% 70.40% 71.30% 70.60% Property, Plant & Equipment 13.80% 13.30% 14.50% 15.90% Total Assets 100.00% 100.00% 100.00% 100.00% Accounts Payable 11.00% 11.30% 10.60% 8.90% Total Current Liabilities 27.10% 27.20% 26.90% 26.10% Total Long Term Liabilities 14.70% 15.10% 13.60% 14.40% Net Worth 58.20% 57.70% 59.50% 59.50% Financial Ratios Quick Ratio 1.26 1.25 1.27 1.29 Current Ratio 2.61 2.59 2.65 2.7 Current Liabilities to Net Worth 46.50% 47.20% 45.30% 43.90% Current Liabilities to Inventory 0.83 0.83 0.82 0.79 Total Debt to Net Worth 0.72 0.73 0.68 0.68 Fixed Assets to Net Worth 0.24 0.23 0.24 0.27 Days Accounts Receivable 58 58 60 53 Inventory Turnover 2.77 2.78 2.72 2.83 Total Assets to Sales 69.70% 69.30% 71.40% 67.60% Accounts Payable to Sales 8.20% 8.40% 8.10% 6.50% Interest Coverage 3.04 2.88 3.28 3.38

52""

Appendix 3B: Apparel Manufacturing Industry Ratios

NAICS: 315 Apparel Manufacturing Data Period: 2014 Company Size All Large Medium Small Size by Revenue Over $50M $5M - $50M Under $5M Company Count 8157 63 440 7654

Income Statement Net Sales 100.00% 100.00% 100.00% 100.00% Gross Margin 31.30% 31.30% 30.20% 32.70% Operating Income 2.30% 2.20% 2.50% 2.70% Net Income 0.90% 0.80% 1.00% 1.10%

Balance Sheet Cash 5.80% 5.80% 5.70% 6.20% Accounts Receivable 23.00% 22.70% 24.10% 22.40% Inventory 35.20% 35.20% 35.90% 33.70% Total Current Assets 70.40% 70.10% 72.10% 69.10% Property, Plant & Equipment 17.40% 17.20% 16.70% 19.30% Total Assets 100.00% 100.00% 100.00% 100.00% Accounts Payable 15.40% 14.70% 16.40% 17.20% Total Current Liabilities 28.20% 27.10% 30.20% 30.30% Total Long Term Liabilities 15.80% 14.20% 17.50% 20.40% Net Worth 56.00% 58.70% 52.40% 49.30%

Financial Ratios Quick Ratio 1.1 1.13 1.06 1.03 Current Ratio 2.5 2.59 2.39 2.28 Current Liabilities to Net Worth 50.40% 46.10% 57.70% 61.40% Current Liabilities to Inventory 0.8 0.77 0.84 0.9 Total Debt to Net Worth 0.79 0.7 0.91 1.03 Fixed Assets to Net Worth 0.31 0.29 0.32 0.39 Days Accounts Receivable 38 39 40 33 Inventory Turnover 4.28 4.16 4.26 4.91 Total Assets to Sales 46.70% 48.00% 46.70% 41.60% Accounts Payable to Sales 7.00% 6.90% 7.50% 7.00% Interest Coverage 2.7 2.56 2.75 3.19

53""

Appendix 3C: Nike Ratios

Profitability Ratios 2012 2013 2014 2015 2016 2017 2018 2019 2020 Gross Profit Margin 0.43398 0.43590 0.44771 0.45969 0.45500 0.44300 0.44800 0.43900 0.44100 Operating Margin 0.12376 0.12914 0.12867 0.13833 0.13693 0.11776 0.14558 0.12271 0.13088 Net Profit Margin 0.09213 0.09817 0.09687 0.10696 0.10295 0.08758 0.10795 0.08918 0.09585 ROA % (Net) 14.59% 15.04% 14.89% 16.29% 14.42% 12.14% 15.27% 12.53% 13.45% ROE % (BV Equity) 21.98% 23.08% 24.50% 27.82% 25.59% 23.24% 28.92% 24.75% 26.92% ROE % (MV Equity) 4.37% 4.42% 4.02% 3.74% 4.07% 4.44% 5.60% 4.60% 5.16% Calculated Tax Rate % 25.48% 24.69% 24.01% 22.16% 23.30% 23.10% 24.10% 25.00% 24.60% Direct cost/sales 0.56602 0.56410 0.55229 0.54031 0.54500 0.55700 0.55200 0.56100 0.55900 SGA/sales 0.30798 0.30735 0.31534 0.32326 0.31500 0.32300 0.30400 0.31600 0.30800 "

Liquidity Ratios 2012 2013 2014 2015 2016 2017 2018 2019 2020 Quick Ratio 2.11669 2.59603 1.93933 1.83754 2.39126 1.73763 2.14536 1.70251 1.99315 Current Ratio 2.98344 3.47071 2.72449 2.52226 3.07604 2.45416 2.78283 2.40779 2.59912 Net Current Assets % TA 49.57% 55.16% 46.62% 44.64% 49.04% 41.27% 46.67% 41.28% 44.16% "

Debt Management 2012 2013 2014 2015 2016 2017 2018 2019 2020 LT Debt to Equity 0.02196 0.10846 0.11077 0.08491 0.27149 0.27775 0.20172 0.35839 0.22523 Debt/Assets EOY 0.32874 0.36556 0.41788 0.41171 0.45998 0.49352 0.45034 0.53160 0.46821 Total Debt to Equity 0.48974 0.57619 0.71785 0.69985 0.85178 0.97442 0.81931 1.13492 0.88044 Interest Coverage 995.33 - 108.39 151.18 50.62 30.43 43.45 32.33 34.79 "

Asset Management 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Asset Turnover 1.58409 1.53185 1.53679 1.52267 1.40022 1.38642 1.41463 1.40528 1.40317 Receivables Turnover 7.51885 7.91402 8.48695 9.01090 9.55060 9.93262 10.42926 10.68999 11.08748 Avg Collection Period 48.54464 46.12067 43.00721 40.50652 38.21749 36.74759 34.99771 34.14410 32.92000 Inventory Turnover (COGS) 4.50354 4.20961 4.16014 3.99179 4.22667 4.20889 4.21685 4.19080 4.18468 Days Inventory Turnover 81.04727 86.70635 87.73741 91.43764 86.35647 86.72122 86.55746 87.09549 87.22290 Accounts Payable Turnover 15.78541 15.65430 15.54754 15.07067 14.57617 16.11863 15.19152 14.46993 14.46122 A/P Turnover (COGS) 8.93490 8.83055 8.58669 8.14282 7.94401 8.97808 8.38572 8.11763 8.08382 Days A/P (COGS) 40.85103 41.33378 42.50765 44.82476 45.94657 40.65458 43.52639 44.96386 45.15192

54""

Asset Management 2012 2013 2014 2015 2016 2017 2018 2019 2020 A/P to Assets 0.10035 0.09785 0.09884 0.10103 0.09606 0.08601 0.09312 0.09712 0.09703 Cash Turnover 11.29588 8.95401 10.00504 10.07938 6.99348 7.41282 7.44744 7.28227 7.20541 Cash to Sales 0.08853 0.11168 0.09995 0.09921 0.14299 0.13490 0.13427 0.13732 0.13878 "

Per Share 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash Flow per Share 1.03 1.69 1.7 2.72 4.34814 2.08131 6.17001 2.33095 6.58326 Book Value per Share 5.67 6.24 6.22 7.41 10.03025 10.54313 11.74069 11.67172 13.07756 Price to Earnings (P/E) 23 22.8 25.9 27.5 30.10 28.29 27.37 28.47 29.32

Appendix 4: Regression Data Appendix 4A: Nike regression data

End of Month

NKE Closing

Price

NKE

Dividend

NKE Stock Split

NKE IRR

12/1/15 $62.50 $0.16 2 -5.26%

11/2/15 $132.28 0.95%

10/1/15 $131.03 6.55%

9/1/15 $122.97 $0.14 10.17%

8/3/15 $111.75 -3.01%

7/1/15 $115.22 6.67%

6/1/15 $108.02 6.25%

5/1/15 $101.67 $0.14 3.00%

4/1/15 $98.84 -1.49%

3/2/15 $100.33 3.31%

2/2/15 $97.12 $0.14 5.43%

1/2/15 $92.25 -4.06%

12/3/01 $56.24 $0.0075 6.15%

11/1/01 $52.99 7.35%

10/1/01 $49.36 5.45%

9/4/01 $46.81 -6.38%

8/1/01 $50.00 5.15%

7/2/01 $47.55 13.24%

55""

End of Month

NKE Closing

Price

NKE

Dividend

NKE Stock Split

NKE IRR

5/1/01 $41.10 -1.70%

4/2/01 $41.81 3.62%

3/1/01 $40.35 $0.0075 3.40%

2/1/01 $39.03 -29.05%

1/2/01 $55.01 -1.43%

Appendix 4B: Market Regression Data and Risk free rates

End of Month SP500 Index

SP500 Dividends

SP500 IRR RUA IRR DJIA IRR

3 month T-bill IRR

10 Year Bond IRR

12/1/15 $2,043.94 $43.39 -1.58% -1.75% -1.66% 0.23% 2.24%

11/2/15 $2,080.41 $43.10 0.22% 0.05% 0.32% 0.12% 2.26%

10/1/15 $2,079.36 $42.80 8.48% 8.30% 8.47% 0.02% 2.07%

9/1/15 $1,920.03 $42.51 -2.46% -2.64% -1.47% 0.02% 2.17%

8/3/15 $1,972.18 $42.25 -6.09% -6.26% -6.57% 0.07% 2.17%

7/1/15 $2,103.84 $42.00 2.14% 1.97% 0.40% 0.03% 2.32%

6/1/15 $2,063.11 $41.74 -1.94% -2.10% -2.17% 0.02% 2.36%

5/1/15 $2,107.39 $41.43 1.21% 1.05% 0.95% 0.02% 2.20%

4/1/15 $2,085.51 $41.12 1.02% 0.85% 0.36% 0.02% 1.94%

3/2/15 $2,067.89 $40.81 -1.58% -1.74% -1.97% 0.03% 2.04%

2/2/15 $2,104.50 $40.35 5.66% 5.49% 5.64% 0.02% 1.98%

1/2/15 $1,994.99 $39.90 -2.94% -3.10% -3.69% 0.03% 1.88%

12/3/01 $1,148.08 $15.74 0.87% 0.76% 1.73% 1.69% 5.09%

11/1/01 $1,139.45 $15.74 7.64% 7.52% 8.56% 1.87% 4.65%

10/1/01 $1,059.78 $15.74 1.94% 1.81% 2.57% 2.16% 4.57%

9/4/01 $1,040.94 $15.74 -8.06% -8.17% -11.08% 2.64% 4.73%

8/1/01 $1,133.58 $15.72 -6.30% -6.41% -5.45% 3.36% 4.97%

7/2/01 $1,211.23 $15.71 -0.97% -1.07% 0.19% 3.51% 5.24%

6/1/01 $1,224.38 $15.69 -2.40% -2.50% -3.75% 3.49% 5.28%

56""

End of Month SP500 Index

SP500 Dividends

SP500 IRR RUA IRR DJIA IRR

3 month T-bill IRR

10 Year Bond IRR

4/2/01 $1,249.46 $15.88 7.80% 7.68% 8.67% 3.87% 5.14%

3/1/01 $1,160.33 $15.97 -6.31% -6.42% -5.87% 4.42% 4.89%

2/1/01 $1,239.94 $16.07 -9.13% -9.23% -3.60% 4.88% 5.10%

1/2/01 $1,366.01 $16.17 5.15% 5.16%

Appendix 4C: Industry competitor Regression Data

End of Month

CROX IRR

SKX IRR DECK IRR

SHOO IRR

ADDYY IRR

UA IRR PMMAF IRR

ASSCY IRR

12/1/15 -8.00% 0.03% -3.56% -5.27% 0.39% -6.51% 2.85% -8.14%

11/2/15 3.06% -3.21% -12.07% -8.46% 8.03% -9.32% -5.16% -15.79%

10/1/15 -16.47% -30.19% -4.13% -4.83% 10.88% -1.76% 14.74% 15.73%

9/1/15 -12.22% -4.73% -9.83% -10.38% 7.57% 1.31% -1.43% -20.90%

8/3/15 -6.36% -6.45% -11.65% -1.97% -8.38% -3.83% 13.00% 9.84%

7/1/15 6.93% 37.03% 1.26% -2.57% 6.42% 19.04% 8.14% 2.73%

6/1/15 -2.19% 3.70% 5.61% 13.23% -1.66% 6.41% 1.31% 0.53%

5/1/15 13.94% 17.74% -7.91% -3.18% -2.91% 1.11% -11.35% 1.82%

4/1/15 11.77% 25.05% 1.55% 2.68% 3.92% -3.96% 0.00% 0.00%

3/2/15 5.92% 5.53% -1.85% 4.08% 1.51% 4.86% -6.50% 0.00%

2/2/15 5.19% 12.91% 12.40% 6.32% 12.80% 6.84% 1.01% 6.79%

1/2/15 -15.13% 9.23% -27.45% 7.89% 0.09% 6.16% -15.13% -6.68%

12/3/01 10.34% 11.84% 17.54%

11/1/01 22.46% -3.31% 33.00%

10/1/01 -7.36% -1.50% -11.33%

9/4/01 -44.38% -9.32% -31.23%

8/1/01 -0.47% 4.76% -17.08%

7/2/01 -27.81% 6.87% -2.57%

6/1/01 -16.72% 0.00% 13.34%

5/1/01 -2.64% 11.97% -9.59%

57""

Appendix 5: Sales Growth Appendix 5A: Final Regression Data

Quarter

Sales Growth

GDP Growth

DPI Growth Euro/Dollar Olympics

Quarter Influence

2001-08 0.0525 0.0058 0.0180 1.1468 0 1

2001-11 -0.1059 0.0124 -0.0018 1.1092 0 0

2002-02 -0.0327 0.0093 0.0141 1.1342 1 0

2002-05 0.1867 0.0094 0.0172 1.1196 0 1

2002-08 0.0425 0.0060 0.0075 1.0247 0 1

2002-11 -0.1007 0.0114 0.0065 1.0125 0 0

2003-02 -0.0453 0.0125 0.0100 0.9493 0 0

2003-05 0.2433 0.0224 0.0138 0.9032 0 1

2003-08 0.0133 0.0165 0.0231 0.8773 0 1

2003-11 -0.0621 0.0145 0.0075 0.8648 0 0

2004-02 0.0236 0.0161 0.0155 0.7984 0 0

2004-05 0.2008 0.0153 0.0162 0.8276 0 1

2004-08 0.0214 0.0157 0.0139 0.8196 1 1

2004-11 -0.1161 0.0200 0.0089 0.7952 0 0

2005-02 0.0508 0.0125 0.0179 0.7587 0 0

2005-05 0.1249 0.0178 0.0020 0.7727 0 1

2005-08 0.0378 0.0133 0.0149 0.8221 0 1

2005-11 -0.1003 0.0200 0.0163 0.8323 0 0

2006-02 0.0397 0.0111 0.0243 0.8350 1 0

2006-05 0.1087 0.0079 0.0150 0.8093 0 1

2006-08 0.0471 0.0114 0.0097 0.7863 0 1

2006-11 -0.0888 0.0119 0.0101 0.7848 0 0

2007-02 0.0275 0.0133 0.0150 0.7638 0 0

End of Month

CROX IRR

SKX IRR DECK IRR

SHOO IRR

ADDYY IRR

UA IRR PMMAF IRR

ASSCY IRR

4/2/01 50.21% 0.29% 21.40%

3/1/01 -10.98% -12.50% 7.80%

2/1/01 4.37% 7.56% 25.29%

58""

Quarter

Sales

Growth GDP

Growth DPI

Growth Euro/Dollar Olympics Quarter

Influence

2007-08 0.0620 0.0079 0.0060 0.7358 0 1

2007-11 -0.0678 -0.0012 0.0107 0.7005 0 0

2008-02 0.0472 0.0099 0.0151 0.6811 0 0

2008-05 0.1196 0.0020 0.0265 0.6406 0 1

2008-08 0.0676 -0.0197 0.0030 0.6483 1 1

2008-11 -0.1550 -0.0114 -0.0095 0.7435 0 0

2009-02 -0.0325 -0.0030 -0.0112 0.7585 0 0

2009-05 0.0613 0.0030 0.0065 0.7520 0 1

2009-08 0.0181 0.0127 -0.0003 0.7080 0 1

2009-11 -0.0819 0.0079 0.0027 0.6771 0 0

2010-02 0.0743 0.0141 0.0063 0.7055 1 0

2010-05 0.0727 0.0114 0.0096 0.7585 0 1

2010-08 0.0193 0.0115 0.0110 0.7908 0 1

2010-11 -0.0643 0.0005 0.0081 0.7379 0 0

2011-02 0.0489 0.0146 0.0210 0.7454 0 0

2011-05 0.1353 0.0082 0.0106 0.7007 0 1

2011-08 0.0546 0.0127 0.0116 0.6975 0 1

2011-11 -0.0576 0.0119 0.0029 0.7310 0 0

2012-02 0.0201 0.0093 0.0179 0.7633 0 0

2012-05 0.1067 0.0066 0.0162 0.7658 0 1

2012-08 0.0308 0.0043 0.0025 0.8059 1 1

2012-11 -0.1071 0.0088 0.0182 0.7753 0 0

2013-02 0.0390 0.0052 -0.0043 0.7543 0 0

2013-05 0.0509 0.0121 -0.0154 0.7700 0 1

2013-08 0.0721 0.0138 0.0101 0.7576 0 1

2013-11 -0.0775 0.0016 0.0065 0.7407 0 0

2014-02 0.0841 0.0168 0.0096 0.7319 1 0

2014-05 0.0650 0.0146 0.0143 0.7250 0 1

59""

Quarter

Sales

Growth GDP

Growth DPI

Growth Euro/Dollar Olympics Quarter

Influence

2014-11 -0.0754 0.0019 0.0089 0.7887 0 0

2015-02 0.0108 0.0150 0.0079 0.8500 0 0

2015-05 0.0428 0.0082 0.0074 0.9144 0 1

2015-08 0.0816 0.0038 0.0146 0.8993 0 1

Appendix 5B: GDP Growth Rate Calculations

Growth Rate of GDP:

Geom Growth last X Qtrs: 3 2 1

For Quarter Ending:

2015-10-01 0.0090 0.0060 0.0038

2015-07-01 0.0083 0.0116 0.0082

2015-04-01 0.0074 0.0084 0.0150

2015-01-01 0.0073 0.0036 0.0019

2014-10-01 0.0122 0.0100 0.0054

2014-07-01 0.0110 0.0157 0.0146

2014-04-01 0.0107 0.0092 0.0168

2014-01-01 0.0091 0.0076 0.0016

2013-10-01 0.0104 0.0129 0.0138

2013-07-01 0.0087 0.0087 0.0121

2013-04-01 0.0061 0.0070 0.0052

2013-01-01 0.0065 0.0065 0.0088

2012-10-01 0.0067 0.0054 0.0043

2012-07-01 0.0093 0.0079 0.0066

2012-04-01 0.0113 0.0106 0.0093

2012-01-01 0.0109 0.0123 0.0119

2011-10-01 0.0118 0.0104 0.0127

2011-07-01 0.0114 0.0082

2011-04-01 0.0146

Mean: 0.922% 0.919% 0.919%

Mean last 20 Qtrs: 0.913%

60""

Appendix 5C: DPI Growth Rate Calculations

Growth Rate of DPI :

Geom Growth last X Qtrs: 3 2 1

For Quarter Ending:

2015-11-01 0.0105 0.0103 0.0077

2015-08-01 0.0098 0.0120 0.0129

2015-05-01 0.0089 0.0083 0.0110

2015-02-01 0.0088 0.0079 0.0055

2014-11-01 0.0110 0.0104 0.0102

2014-08-01 0.0121 0.0114 0.0107

2014-05-01 0.0103 0.0128 0.0122

2014-02-01 0.0093 0.0093 0.0134

2013-11-01 0.0071 0.0072 0.0052

2013-08-01 -0.0059 0.0080 0.0092

2013-05-01 0.0006 -0.0134 0.0068

2013-02-01 -0.0012 -0.0025 -0.0331

2012-11-01 0.0131 0.0151 0.0292

2012-08-01 0.0120 0.0052 0.0012

2012-05-01 0.0118 0.0175 0.0093

2012-02-01 0.0128 0.0131 0.0257

2011-11-01 0.0066 0.0064 0.0006

2011-08-01 0.0095 0.0123

2011-05-01 0.0068

Mean: 0.809% 0.825% 0.825%

Mean last 20 Qtrs: 0.774%

61""

Appendix 5D: Euro/Dollar Exchange Growth Rate Calculations

Euro/Dollar Exchange Rate:

Geom Growth last X Qtrs: 3 2 1

For Quarter Ending:

2015-11-01 0.0208 -0.0057 0.0053

2015-08-01 0.0447 0.0286 -0.0165

2015-05-01 0.0722 0.0768 0.0758

2015-02-01 0.0544 0.0705 0.0778

2014-11-01 0.0252 0.0430 0.0632

2014-08-01 0.0005 0.0068 0.0231

2014-05-01 -0.0145 -0.0106 -0.0093

2014-02-01 -0.0168 -0.0171 -0.0120

2013-11-01 -0.0061 -0.0192 -0.0223

2013-08-01 -0.0077 0.0022 -0.0161

2013-05-01 -0.0151 -0.0034 0.0208

2013-02-01 -0.0050 -0.0325 -0.0270

2012-11-01 0.0052 0.0062 -0.0380

2012-08-01 0.0330 0.0275 0.0524

2012-05-01 0.0316 0.0235 0.0033

2012-02-01 0.0289 0.0461 0.0441

2011-11-01 -0.0065 0.0214 0.0481

2011-08-01 -0.0327 -0.0046

2011-05-01 -0.0600

Mean: 1.442% 1.284% 1.095%

Mean last 20 Qtrs: 1.005%

Appendix 5E: Quarterly Revenue Growth results

Quarter Beta-Hat 2/28/16 5/30/16 8/31/16 11/30/16 2/28/17 5/30/17

GDP Growth 1.8893 0.913% 0.913% 0.913% 0.913% 0.913% 0.913%

DPI Growth 2.0459 0.774% 0.774% 0.774% 0.774% 0.774% 0.774%

Euro/Dollar -0.0787 0.9121 0.9213 0.9305 0.9398 0.9493 0.9588

62""

Quarter Beta-Hat 2/28/16 5/30/16 8/31/16 11/30/16 2/28/17 5/30/17

Olympics 0.0316 0 0 1 0 0 0

Quarter Influence 0.1115 0 1 1 0 0 1

Growth of Revenue -3.871% 7.207% 10.291% -4.089% -4.163% 6.912%

Quarter Beta-Hat 8/31/17 11/30/17 2/28/18 5/29/18 8/31/18

GDP Growth 1.8893 0.913% 0.913% 0.913% 0.913% 0.913%

DPI Growth 2.0459 0.774% 0.774% 0.774% 0.774% 0.774%

Euro/Dollar -0.0787 0.9684 0.9782 0.9880 0.9979 0.9884

Olympics 0.0316 0 0 1 0 0

Quarter Influence 0.1115 1 0 0 1 1

Growth of Revenue 6.836% -4.390% -1.311% 6.604% 6.679%

Quarter Beta-Hat 11/30/18 2/28/19 5/29/19 8/31/19 11/30/19

GDP Growth 1.8893 0.913% 0.913% 0.913% 0.913% 0.913%

DPI Growth 2.0459 0.774% 0.774% 0.774% 0.774% 0.774%

Euro/Dollar -0.0787 0.9790 0.9696 0.9604 0.9700 0.9797

Olympics 0.0316 0 0 0 0 0

Quarter Influence 0.1115 0 0 1 1 0

Growth of Revenue -4.397% -4.323% 6.900% 6.824% -4.403%

Quarter Beta-Hat 2/28/20 5/29/20 8/31/20 11/30/20 2/28/21

GDP Growth 1.8893 0.913% 0.913% 0.913% 0.913% 0.913%

DPI Growth 2.0459 0.774% 0.774% 0.774% 0.774% 0.774%

Euro/Dollar -0.0787 0.9896 0.9995 1.0095 1.0197 1.0299

Olympics 0.0316 0 0 1 0 0

Quarter Influence 0.1115 0 1 1 0 0

Growth of Revenue -4.480% 6.591% 9.669% -4.717% -4.798%

63""

Appendix 6: Depreciation Waterfall Appendix 6A: Buildings Depreciation Waterfall

"

Deprec&Life:Year:& 1 2 3 4 …….. 35 36 37 38 39

39 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564%

Year: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Enter3Drivers:Deprec3Life3(yrs) 39 39 39 39 39 39 39 39 39 39 39Acct@Salvage3Value3(proportion3of3new3price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Years3to3Hold3till3sold: 25 24 23 22 21 20 19 18 17 16 15Proportion3of3new3price3obtained3when3sold 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Building3Purchases/year3 15000.00 50250.00 85500.00 27550.00 96750.00 62250.00 28748.19 42325.99 52091.85 56551.49 101929.41

Depreciable3Amt 15000.00 50250.00 85500.00 27550.00 96750.00 62250.00 28748.19 42325.99 52091.85 56551.49 101929.41

Gross3PPE3of3assets3still3owned2010 Purchased&Equip. 15000.00 15000.00 15000.00 15000.00 15000.00 15000.00 15000.00 15000.00 15000.00 15000.00 15000.002011 Purchased&Equip. 50250.00 50250.00 50250.00 50250.00 50250.00 50250.00 50250.00 50250.00 50250.00 50250.002012 Purchased&Equip. 85500.00 85500.00 85500.00 85500.00 85500.00 85500.00 85500.00 85500.00 85500.002013 Purchased&Equip. 27550.00 27550.00 27550.00 27550.00 27550.00 27550.00 27550.00 27550.002014 Purchased&Equip. 96750.00 96750.00 96750.00 96750.00 96750.00 96750.00 96750.002015 Purchased&Equip. 62250.00 62250.00 62250.00 62250.00 62250.00 62250.002016 Purchased&Equip. 28748.19 28748.19 28748.19 28748.19 28748.192017 Purchased&Equip. 42325.99 42325.99 42325.99 42325.992018 Purchased&Equip. 52091.85 52091.85 52091.852019 Purchased&Equip. 56551.49 56551.492020 Purchased&Equip. 101929.41

19,272 617022.00 667272.00 752772.00 780322.00 877072.00 925072.00 953820.19 996146.18 1048238.03 1104789.52 1206718.93Accum3Gross3PPE: 597750.00 648000.00 733500.00 761050.00 857800.00 905800.00 934548.19 976874.18 1028966.03 1085517.52 1187446.93

Deprec Year 1 384.62 1288.46 2192.31 706.41 2480.77 1596.15 737.13 1085.28 1335.69 1450.04 2613.57Year 2 1980.77 384.62 1288.46 2192.31 706.41 2480.77 1596.15 737.13 1085.28 1335.69 1450.04Year 3 1519.23 1980.77 384.62 1288.46 2192.31 706.41 2480.77 1596.15 737.13 1085.28 1335.69Year 4 865.38 1519.23 1980.77 384.62 1288.46 2192.31 706.41 2480.77 1596.15 737.13 1085.28Year 5 750.00 865.38 1519.23 1980.77 384.62 1288.46 2192.31 706.41 2480.77 1596.15 737.13Year 6 1019.23 750.00 865.38 1519.23 1980.77 384.62 1288.46 2192.31 706.41 2480.77 1596.15Year 7 19.23 1019.23 750.00 865.38 1519.23 1980.77 384.62 1288.46 2192.31 706.41 2480.77Year 8 365.38 19.23 1019.23 750.00 865.38 1519.23 1980.77 384.62 1288.46 2192.31 706.41Year 9 4057.69 365.38 19.23 1019.23 750.00 865.38 1519.23 1980.77 384.62 1288.46 2192.31Year 10 2653.85 4057.69 365.38 19.23 1019.23 750.00 865.38 1519.23 1980.77 384.62 1288.46Year 11 519.23 2653.85 4057.69 365.38 19.23 1019.23 750.00 865.38 1519.23 1980.77 384.62Year 12 76.92 519.23 2653.85 4057.69 365.38 19.23 1019.23 750.00 865.38 1519.23 1980.77Year 13 0.00 76.92 519.23 2653.85 4057.69 0.00 19.23 1019.23 750.00 865.38 1519.23Year 14 96.15 0.00 76.92 519.23 2653.85 4057.69 0.00 19.23 1019.23 750.00 865.38Year 15 96.15 96.15 0.00 76.92 519.23 2653.85 4057.69 0.00 19.23 1019.23 750.00Year 16 134.62 96.15 96.15 0.00 76.92 519.23 2653.85 4057.69 0.00 19.23 1019.23Year 17 0.00 134.62 96.15 96.15 0.00 76.92 519.23 2653.85 4057.69 0.00 19.23Year 18 153.85 0.00 134.62 96.15 96.15 0.00 76.92 519.23 2653.85 0.00 19.23Year 19 0.00 153.85 0.00 134.62 96.15 96.15 0.00 76.92 519.23 2653.85 4057.69Year 20 442.31 0.00 153.85 0.00 134.62 96.15 96.15 0.00 76.92 519.23 2653.85Year 21 192.31 442.31 0.00 153.85 0.00 134.62 96.15 96.15 0.00 76.92 519.23Year 22 192.31 442.31 0.00 153.85 0.00 134.62 96.15 96.15 0.00 76.92Year 23 192.31 442.31 0.00 153.85 0.00 134.62 96.15 96.15 0.00Year 24 192.31 442.31 0.00 153.85 0.00 134.62 96.15 96.15Year 25 192.31 442.31 0.00 153.85 0.00 134.62 96.15Year 26 192.31 442.31 0.00 153.85 0.00 134.62Year 27 192.31 442.31 0.00 153.85 0.00Year 28 192.31 442.31 0.00 153.85Year 29 192.31 442.31 0.00Year 30 192.31 442.31Year 31 192.31

Total3Deprec3this3Year: 15326.92 16615.38 18807.69 19514.10 21994.87 23225.64 23962.77 25048.06 26383.74 23776.09 30466.59

Accum3Deprec3Calculations:2010 Purchased&Equip. 384.62 769.23 1153.85 1538.46 1923.08 2307.69 2692.31 3076.92 3461.54 3846.15 4230.772011 Purchased&Equip. 1288.46 2576.92 3865.38 5153.85 6442.31 7730.77 9019.23 10307.69 11596.15 12884.622012 Purchased&Equip. 2192.31 4384.62 6576.92 8769.23 10961.54 13153.85 15346.15 17538.46 19730.772013 Purchased&Equip. 706.41 1412.82 2119.23 2825.64 3532.05 4238.46 4944.87 5651.282014 Purchased&Equip. 2480.77 4961.54 7442.31 9923.08 12403.85 14884.62 17365.382015 Purchased&Equip. 1596.15 3192.31 4788.46 6384.62 7980.77 9576.922016 Purchased&Equip. 737.13 1474.27 2211.40 2948.53 3685.662017 Purchased&Equip. 1085.28 2170.56 3255.85 4341.132018 Purchased&Equip. 1335.69 2671.38 4007.072019 Purchased&Equip. 1450.04 2900.082020 Purchased&Equip. 2613.57

Accum3Deprec: 115576.92 132192.31 151000.00 170514.10 192508.97 211350.00 235312.77 260360.83 286744.57 310520.66 340968.02

Net3PPE: 482173.08 515807.69 582500.00 590535.90 665291.03 694450.00 699235.41 716513.35 742221.45 774996.85 846478.90

64""

Appendix 6B: Lease Hold Improvements Waterfall

"

Deprec&Life:Year: 1 2 3 4 5 ……. 12 13 14 15

15 6.67% 6.67% 6.67% 6.67% 6.67% 6.67% 6.67% 6.67% 6.67% 6.67%

Year: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Enter&Drivers:Deprec&Life&(yrs) 15 15 15 15 15 15 15 15 15 15 15Acct4Salvage&Value&(proportion&of&new&price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Years&to&Hold&till&sold: 15 15 15 15 15 15 15 15 15 15 15Proportion&of&new&price&obtained&when&sold

PPE&Gross&Purchases/year&(Known&via&10k) 19,562.50333 61,862.50333 79,787.50333 40,187.50333 118,350.003 94,962.50333 96,474.17333 79,771.73333 91,604.29333 104,049.113 140,755.593Depreciable&Amt 19,562.50333 61,862.50333 79,787.50333 40,187.50333 118,350.003 94,962.50333 96,474.17333 79,771.73333 91,604.29333 104,049.113 140,755.593

Gross&LHI&2010 Leasehold3Improvement 19562.50 19562.50 19562.50 19562.50 19562.50 19562.50 19562.50 19562.50 19562.50 19562.50 19562.502011 Leasehold3Improvement 61862.50 61862.50 61862.50 61862.50 61862.50 61862.50 61862.50 61862.50 61862.50 61862.502012 Leasehold3Improvement 79787.50 79787.50 79787.50 79787.50 79787.50 79787.50 79787.50 79787.50 79787.502013 Leasehold3Improvement 40187.50 40187.50 40187.50 40187.50 40187.50 40187.50 40187.50 40187.502014 Leasehold3Improvement 118350.00 118350.00 118350.00 118350.00 118350.00 118350.00 118350.002015 Leasehold3Improvement 94962.50 94962.50 94962.50 94962.50 94962.50 94962.502016 Leasehold3Improvement 96474.17 96474.17 96474.17 96474.17 96474.172017 Leasehold3Improvement 79771.73 79771.73 79771.73 79771.732018 Leasehold3Improvement 91604.29 91604.29 91604.292019 Leasehold3Improvement 104049.11 104049.112020 Leasehold3Improvement 140755.59

Accum&Gross&LHI: 674035.00 727167.50 795435.00 790025.00 898950.00 972372.50 961229.17 994580.90 1073512.69 1177561.80 1275642.39

Deprec Year 1 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83 6431.61 5318.12 6106.95 6936.61 9383.71Year 2 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83 6431.61 5318.12 6106.95 6936.61Year 3 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83 6431.61 5318.12 6106.95Year 4 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83 6431.61 5318.12Year 5 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83 6431.61Year 6 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00 6330.83Year 7 1070.83 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17 7890.00Year 8 844.83 1070.83 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17 2679.17Year 9 3094.67 844.83 1070.83 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17 5319.17Year 10 7174.50 3094.67 844.83 0.00 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17 4124.17Year 11 1436.00 7174.50 3094.67 844.83 0.00 2845.00 2360.83 4180.83 8720.00 7956.67 1304.17Year 12 628.33 1436.00 7174.50 3094.67 844.83 0.00 2845.00 2360.83 4180.83 8720.00 7956.67Year 13 1969.00 628.33 1436.00 7174.50 3094.67 844.83 0.00 2845.00 2360.83 4180.83 8720.00Year 14 768.00 1969.00 628.33 1436.00 7174.50 3094.67 844.83 0.00 2845.00 2360.83 4180.83Year 15 582.00 768.00 1969.00 628.33 1436.00 7174.50 3094.67 844.83 0.00 2845.00 2360.83

Total&Deprec&this&Year: 44935.67 48477.83 53029.00 52668.33 59930.00 64824.83 64081.94 66305.39 71567.51 78504.12 85042.83

Accum&Deprec&Calculations:2010 Leasehold3Improvement 1304.17 2608.33 3912.50 5216.67 6520.83 7825.00 9129.17 10433.33 11737.50 13041.67 14345.832011 Leasehold3Improvement 4124.17 8248.33 12372.50 16496.67 20620.83 24745.00 28869.17 32993.33 37117.50 41241.672012 Leasehold3Improvement 5319.17 10638.33 15957.50 21276.67 26595.83 31915.00 37234.17 42553.33 47872.502013 Leasehold3Improvement 2679.17 5358.33 8037.50 10716.67 13395.83 16075.00 18754.17 21433.332014 Leasehold3Improvement 7890.00 15780.00 23670.00 31560.00 39450.00 47340.00 55230.002015 Leasehold3Improvement 6330.83 12661.67 18992.50 25323.33 31654.17 37985.002016 Leasehold3Improvement 6431.61 12863.22 19294.83 25726.44 32158.062017 Leasehold3Improvement 5318.12 10636.23 15954.35 21272.462018 Leasehold3Improvement 6106.95 12213.90 18320.862019 Leasehold3Improvement 6936.61 13873.212020 Leasehold3Improvement 9383.71

Accum&Deprec: 271241.50 310989.33 352498.33 365994.17 416499.17 459784.00 416248.44 436133.84 495028.85 573532.97 615900.80

Net&LHI 402793.50 416178.17 442936.67 424030.83 482450.83 512588.50 544980.72 558447.06 578483.84 604028.83 659741.59

65""

Appendix 6C: 5 Year Equipment Waterfall

SumDeprec&Life: Equals)1)?

Year: 1 2 3 4 55 20.000% 20.000% 20.000% 20.000% 20.000% YES/OK

Year: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Enter)Drivers:Deprec)Life)(yrs) 5 5 5 5 5 5 5 5 5 5 5AcctFSalvage)Value)(proportion)of)new)price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Years)to)Hold)till)sold: 5 5 5 5 5 5 5 5 5 5 5Proportion)of)new)price)obtained)when)sold 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

5)YR)EQ)Purchases/year) 85,349.68&&&& 92,855.68&&&& 98,840.68&&&& 78,164.00&&&& 104,131.68&& 100,010.68&& 137,199.55&& 238,439.91&& 64,477.03&&&& 92,657.43&&&& 37,167.73&&&&

Depreciable)Amt 85,349.68&&&& 92,855.68&&&& 98,840.68&&&& 78,164.00&&&& 104,131.68&& 100,010.68&& 137,199.55&& 238,439.91&& 64,477.03&&&& 92,657.43&&&& 37,167.73&&&&

Gross)PPE)of)assets)still)owned2010 Purchased&Equip. 85349.68 85349.68 85349.68 85349.68 85349.68 0.00 0.00 0.00 0.00 0.00 0.002011 Purchased&Equip. 92855.68 92855.68 92855.68 92855.68 92855.68 0.00 0.00 0.00 0.00 0.002012 Purchased&Equip. 98840.68 98840.68 98840.68 98840.68 98840.68 0.00 0.00 0.00 0.002013 Purchased&Equip. 78164.00 78164.00 78164.00 78164.00 78164.00 0.00 0.00 0.002014 Purchased&Equip. 104131.68 104131.68 104131.68 104131.68 104131.68 0.00 0.002015 Purchased&Equip. 100010.68 100010.68 100010.68 100010.68 100010.68 0.002016 Purchased&Equip. 137199.55 137199.55 137199.55 137199.55 137199.552017 Purchased&Equip. 137199.55 137199.55 137199.55 137199.552018 Purchased&Equip. 137199.55 137199.55 137199.552019 Purchased&Equip. 137199.55 137199.552020 Purchased&Equip. 137199.55

Accum)Gross)PPE: 439,702.40&& 449,061.40&& 461,571.40&& 452,354.72&& 459,341.72&& 474,002.72&& 518,346.59&& 556,705.46&& 615,741.01&& 648,808.88&& 685,997.76&&

Deprec Year 1 17069.94 18571.14 19768.14 15632.80 20826.34 20002.14 27439.91 47687.98 12895.41 18531.49 7433.55Year 2 19428.94 17069.94 18571.14 19768.14 15632.80 20826.34 20002.14 27439.91 47687.98 12895.41 18531.49Year 3 17476.14 19428.94 17069.94 18571.14 19768.14 15632.80 20826.34 20002.14 27439.91 47687.98 12895.41Year 4 17266.14 17476.14 19428.94 17069.94 18571.14 19768.14 15632.80 20826.34 20002.14 27439.91 47687.98Year 5 16699.34 17266.14 17476.14 19428.94 17069.94 18571.14 19768.14 15632.80 20826.34 20002.14 27439.91

Total)Deprec)this)Year: 87940.48 89812.28 92314.28 90470.94 91868.34 94800.54 103669.32 131589.16 128851.77 126556.92 113988.33

Accum)Deprec)Calculations:2010 Purchased&Equip. 17069.94 34139.87 51209.81 68279.74 85349.68 0.00 0.00 0.00 0.00 0.00 0.002011 Purchased&Equip. 18571.14 37142.27 55713.41 74284.54 92855.68 0.00 0.00 0.00 0.00 0.002012 Purchased&Equip. 19768.14 39536.27 59304.41 79072.54 98840.68 0.00 0.00 0.00 0.002013 Purchased&Equip. 15632.80 31265.60 46898.40 62531.20 78164.00 0.00 0.00 0.002014 Purchased&Equip. 20826.34 41652.67 62479.01 83305.34 104131.68 0.00 0.002015 Purchased&Equip. 20002.14 40004.27 60006.41 80008.54 100010.68 0.002016 Purchased&Equip. 27439.91 54879.82 82319.73 109759.64 137199.552017 Purchased&Equip. 47687.98 95375.96 143063.94 190751.932018 Purchased&Equip. 12895.41 25790.81 38686.222019 Purchased&Equip. 18531.49 37062.972020 Purchased&Equip. 7433.55

Accum)Deprec: 260917.44 267233.04 273216.64 276306.90 271030.57 280481.43 291295.07 324043.55 374731.32 397156.56 411134.21

Net)PPE: 178784.96 181828.36 188354.76 176047.82 188311.15 193521.29 227051.52 232661.91 241009.69 251652.32 274863.54

66""

Appendix 6D: 7 Year Equipment Waterfall:

Deprec&Life:Year: 1 2 3 4 5 6 7

7 14.286% 14.286% 14.286% 14.286% 14.286% 14.286% 14.286%

Year: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Enter3Drivers:Deprec3Life3(yrs) 7 7 7 7 7 7 7 7 7 7 7Acct@Salvage3Value3(proportion3of3new3price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Years3to3Hold3till3sold: 7 7 7 7 7 7 7 7 7 7 7Proportion3of3new3price3obtained3when3sold 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

73YR3EQ3Purchases/year3 137,428.69&& 147,571.54&& 156,725.11&&&&& 124,067.97&& 164,928.69&&&&& 158,450.11&&&&& 244,572.78&&&&& 181,507.12&&&&& 194,703.50&&&&& 207,354.64&&&&& 255,857.29&&&&&

Depreciable3Amt 137,428.69&& 147,571.54&& 156,725.11&&&&& 124,067.97&& 164,928.69&&&&& 158,450.11&&&&& 244,572.78&&&&& 181,507.12&&&&& 194,703.50&&&&& 207,354.64&&&&& 255,857.29&&&&&

Gross3PPE3of3assets3still3owned2010 Purchased&Equip. 137428.69 137428.69 137428.69 137428.69 137428.69 137428.69 137428.69 0.00 0.00 0.00 0.002011 Purchased&Equip. 147571.54 147571.54 147571.54 147571.54 147571.54 147571.54 147571.54 0.00 0.00 0.002012 Purchased&Equip. 156725.11 156725.11 156725.11 156725.11 156725.11 156725.11 156725.11 0.00 0.002013 Purchased&Equip. 124067.97 124067.97 124067.97 124067.97 124067.97 124067.97 124067.97 0.002014 Purchased&Equip. 164928.69 164928.69 164928.69 164928.69 164928.69 164928.69 164928.692015 Purchased&Equip. 158450.11 158450.11 158450.11 158450.11 158450.11 158450.112016 Purchased&Equip. 244572.78 244572.78 244572.78 244572.78 244572.782017 Purchased&Equip. 181507.12 181507.12 181507.12 181507.122018 Purchased&Equip. 194703.50 194703.50 194703.502019 Purchased&Equip. 207354.64 207354.642020 Purchased&Equip. 255857.29

Accum3Gross3PPE: 948,872.23&& 977,318.66&& 1,004,568.66&& 996,693.66&& 1,025,850.80&& 1,043,886.51&& 1,133,744.89&& 1,177,823.33&& 1,224,955.28&& 1,275,584.80&& 1,407,374.12&&

Deprec Year 1 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73 34938.97 25929.59 27814.79 29622.09 36551.04Year 2 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73 34938.97 25929.59 27814.79 29622.09Year 3 20059.20 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73 34938.97 25929.59 27814.79Year 4 19395.93 20059.20 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73 34938.97 25929.59Year 5 18849.00 19395.93 20059.20 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73 34938.97Year 6 18496.44 18849.00 19395.93 20059.20 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24 22635.73Year 7 17017.87 18496.44 18849.00 19395.93 20059.20 22102.06 19632.67 21081.65 22389.30 17724.00 23561.24

Total3Deprec3this3Year: 135553.18 139616.95 143509.81 142384.81 146550.11 149126.64 161963.56 168260.48 174993.61 182226.40 201053.45

2010 Purchased&Equip. 19632.67 39265.34 58898.01 78530.68 98163.35 117796.02 137428.69 0.00 0.00 0.00 0.002011 Purchased&Equip. 21081.65 42163.30 63244.95 84326.60 105408.24 126489.89 147571.54 0.00 0.00 0.002012 Purchased&Equip. 22389.30 44778.60 67167.91 89557.21 111946.51 134335.81 156725.11 0.00 0.002013 Purchased&Equip. 17724.00 35447.99 53171.99 70895.98 88619.98 106343.98 124067.97 0.002014 Purchased&Equip. 23561.24 47122.48 70683.72 94244.96 117806.20 141367.44 164928.692015 Purchased&Equip. 22635.73 45271.46 67907.19 90542.92 113178.65 135814.382016 Purchased&Equip. 34938.97 69877.94 104816.91 139755.87 174694.842017 Purchased&Equip. 25929.59 51859.18 77788.77 103718.352018 Purchased&Equip. 27814.79 55629.57 83444.362019 Purchased&Equip. 29622.09 59244.182020 Purchased&Equip. 36551.04

Accum3Deprec: 525946.89 546438.72 560473.42 570915.25 581693.82 590406.07 597655.23 628487.01 655909.08 681410.37 758395.84

Net3PPE: 422925.34 430879.93 444095.24 425778.40 444156.98 453480.44 536089.67 549336.31 569046.20 594174.43 648978.28

67""

Appendix 6E: 15 Year Equipment Waterfall:

Deprec&Life:Year: 1 2 3 4 …… 11 12 13 14 15

15 6.667% 6.667% 6.667% 6.667% 6.667% 6.667% 6.667% 6.667% 6.667% 6.667%

Year: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Enter3Drivers:Deprec3Life3(yrs) 15 15 15 15 15 15 15 15 15 15 15Acct@Salvage3Value3(proportion3of3new3price) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Years3to3Hold3till3sold: 15 15 15 15 15 15 15 15 15 15 15Proportion3of3new3price3obtained3when3sold 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

153YR3EQ3Purchases/year3 332,625.00&&&&& 373,050.00&&&&& 413,250.00&&&&& 447,750.00&&&&& 506,400.00&&&&& 499,350.00&&&&& 243,858.30&&&&& 400,977.08&&&&& 446,565.28&&&&& 489,255.83&&&&& 661,332.86&&&&&

Depreciable3Amt 332,625.00&&&&& 373,050.00&&&&& 413,250.00&&&&& 447,750.00&&&&& 506,400.00&&&&& 499,350.00&&&&& 243,858.30&&&&& 400,977.08&&&&& 446,565.28&&&&& 489,255.83&&&&& 661,332.86&&&&&

Gross3PPE3of3assets3still3owned2010 Purchased&Equip. 332625.00 332625.00 332625.00 332625.00 332625.00 332625.00 332625.00 332625.00 332625.00 332625.00 332625.002011 Purchased&Equip. 373050.00 373050.00 373050.00 373050.00 373050.00 373050.00 373050.00 373050.00 373050.00 373050.002012 Purchased&Equip. 413250.00 413250.00 413250.00 413250.00 413250.00 413250.00 413250.00 413250.00 413250.002013 Purchased&Equip. 447750.00 447750.00 447750.00 447750.00 447750.00 447750.00 447750.00 447750.002014 Purchased&Equip. 506400.00 506400.00 506400.00 506400.00 506400.00 506400.00 506400.002015 Purchased&Equip. 499350.00 499350.00 499350.00 499350.00 499350.00 499350.002016 Purchased&Equip. 243858.30 243858.30 243858.30 243858.30 243858.302017 Purchased&Equip. 400977.08 400977.08 400977.08 400977.082018 Purchased&Equip. 446565.28 446565.28 446565.282019 Purchased&Equip. 489255.83 489255.832020 Purchased&Equip. 661332.86

Accum3Gross3PPE: 3,156,950.25&& 3,444,140.85&& 3,747,030.00&& 4,061,670.00&& 4,429,575.00&& 4,781,640.00&& 4,857,903.30&& 5,055,345.38&& 5,271,105.66&& 5,519,071.49&& 5,951,144.35&&

Deprec Year 1 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00 16257.22 26731.81 29771.02 32617.06 44088.86Year 2 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00 16257.22 26731.81 29771.02 32617.06Year 3 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00 16257.22 26731.81 29771.02Year 4 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00 16257.22 26731.81Year 5 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00 16257.22Year 6 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00 33290.00Year 7 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00 33760.00Year 8 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00 29850.00Year 9 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00 27550.00Year 10 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00 24870.00Year 11 9819.00 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00 22175.00Year 12 9233.00 9819.00 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00 20943.00Year 13 8874.00 9233.00 9819.00 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00 20050.00Year 14 7357.39 8874.00 9233.00 9819.00 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00 18172.00Year 15 5723.96 7357.39 8874.00 9233.00 9819.00 11173.00 13569.00 15387.00 16086.00 15284.00 16617.00Year 16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 18 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 19 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 24 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 25 0.00 0.00 0.00 0.00 0.00 0.00 0.00Year 26 0.00 0.00 0.00 0.00 0.00 0.00Year 27 0.00 0.00 0.00 0.00 0.00Year 28 0.00 0.00 0.00 0.00Year 29 0.00 0.00 0.00Year 30 0.00 0.00Year 31 0.00

Total3Deprec3this3Year: 210463.35 229609.39 249802.00 270778.00 295305.00 318776.00 323860.22 337023.03 351407.04 367938.10 396742.96

Accum3Deprec3Calculations:1990 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001991 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001992 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001993 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001994 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001995 Purchased&Equip. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 Purchased&Equip. 85859.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 Purchased&Equip. 103003.46 110360.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 Purchased&Equip. 115362.00 124236.00 133110.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001999 Purchased&Equip. 110796.00 120029.00 129262.00 138495.00 0.00 0.00 0.00 0.00 0.00 0.00 0.002000 Purchased&Equip. 108009.00 117828.00 127647.00 137466.00 147285.00 0.00 0.00 0.00 0.00 0.00 0.002001 Purchased&Equip. 111730.00 122903.00 134076.00 145249.00 156422.00 167595.00 0.00 0.00 0.00 0.00 0.002002 Purchased&Equip. 122121.00 135690.00 149259.00 162828.00 176397.00 189966.00 203535.00 0.00 0.00 0.00 0.002003 Purchased&Equip. 123096.00 138483.00 153870.00 169257.00 184644.00 200031.00 215418.00 230805.00 0.00 0.00 0.002004 Purchased&Equip. 112602.00 128688.00 144774.00 160860.00 176946.00 193032.00 209118.00 225204.00 241290.00 0.00 0.002005 Purchased&Equip. 91704.00 106988.00 122272.00 137556.00 152840.00 168124.00 183408.00 198692.00 213976.00 229260.00 0.002006 Purchased&Equip. 83085.00 99702.00 116319.00 132936.00 149553.00 166170.00 182787.00 199404.00 216021.00 232638.00 249255.002007 Purchased&Equip. 72688.00 90860.00 109032.00 127204.00 145376.00 163548.00 181720.00 199892.00 218064.00 236236.00 254408.002008 Purchased&Equip. 60150.00 80200.00 100250.00 120300.00 140350.00 160400.00 180450.00 200500.00 220550.00 240600.00 260650.002009 Purchased&Equip. 41886.00 62829.00 83772.00 104715.00 125658.00 146601.00 167544.00 188487.00 209430.00 230373.00 251316.002010 Purchased&Equip. 22175.00 44350.00 66525.00 88700.00 110875.00 133050.00 155225.00 177400.00 199575.00 221750.00 243925.002011 Purchased&Equip. 24870.00 49740.00 74610.00 99480.00 124350.00 149220.00 174090.00 198960.00 223830.00 248700.002012 Purchased&Equip. 27550.00 55100.00 82650.00 110200.00 137750.00 165300.00 192850.00 220400.00 247950.002013 Purchased&Equip. 29850.00 59700.00 89550.00 119400.00 149250.00 179100.00 208950.00 238800.002014 Purchased&Equip. 33760.00 67520.00 101280.00 135040.00 168800.00 202560.00 236320.002015 Purchased&Equip. 33290.00 66580.00 99870.00 133160.00 166450.00 199740.002016 Purchased&Equip. 16257.22 32514.44 48771.66 65028.88 81286.102017 Purchased&Equip. 26731.81 53463.61 80195.42 106927.222018 Purchased&Equip. 29771.02 59542.04 89313.062019 Purchased&Equip. 32617.06 65234.112020 Purchased&Equip. 44088.86

Accum3Deprec: 1364266.86 1508016.85 1647458.00 1785126.00 1941936.00 2113427.00 2269692.22 2403180.25 2523782.29 2650430.39 2817913.35

Net3PPE: 1792683.39 1936124.00 2099572.00 2276544.00 2487639.00 2668213.00 2588211.08 2652165.14 2747323.37 2868641.10 3133231.01

68""

Appendix 6F: Accumulated Depreciation Error"

1990 1991 1992 2000 2001 2002 2012 2013 2014 2015 Our AccumDep $16.36 $51.40 $103.77 $924.74 $1,035.23 $1,165.40 $2,957.61 $3,127.12 $3,370.68 $3,622.52 Actual AccumDep $78.80 $105.14 $151.76 $810.40 $934.00 $1,127.20 $2,965.00 $3,048.00 $3,386.00 $3,341.00 % Error -79.24% -51.11% -31.62% 14.11% 10.84% 3.39% -0.25% 2.60% -0.45% 8.43%

*Depreciation numbers in millions of dollars

Appendix 6G: Total Net PPE Calculations and Forecasts

Goal Seek Values: %/category 2016 2017 2018 2019 2020

Buildings 15.22% $ 699,611.27 $ 716,898.49 $ 742,620.42 $ 775,413.44 $ 846,933.91 LHI 11.85% $ 544,980.72 $ 558,447.06 $ 578,483.84 $ 604,028.83 $ 659,741.59 5yr EQ 4.94% $ 227,158.16 $ 232,771.18 $ 241,122.88 $ 251,770.51 $ 274,992.63 7yr EQ 11.67% $ 536,341.64 $ 549,594.51 $ 569,313.66 $ 594,453.71 $ 649,283.31 15yr EQ 56.32% $ 2,589,642.86 $ 2,653,632.29 $ 2,748,843.17 $ 2,870,228.01 $ 3,134,964.29 Total net PPE 100.00% $ 4,597,734.65 $ 4,711,343.54 $ 4,880,383.97 $ 5,095,894.50 $ 5,565,915.74

Appendix 7: Drivers 2016 2017 2018 2019 2020 Capacity Utilization 62.00% 67.10% 66.10% 67.80% 65.00% Sales Growth 2.64% 7.39% 6.20% 5.74% 4.29% COGS / Sales 54.50% 55.70% 55.20% 56.10% 55.90% SG&A / Sales 31.50% 32.30% 30.40% 31.60% 30.80% Other Op Exp's / Sales 0.31% 0.22% -0.16% 0.03% 0.21% Short Term Interest Rate 11.40% 8.70% 10.20% 12.10% 9.70% Long Term Interest Rate 3.13% 3.13% 3.01% 2.94% 2.94% Tax Rate 23.30% 23.10% 24.10% 25.00% 24.60% Dividend Growth Rate 14.00% 16.67% 14.00% 8.00% 8.00% Dividend Price 0.616 0.718 0.819 0.884 0.955 Shares Outstanding 1252500.870 1219935.848 1182117.836 1150082.443 1124205.588 Common stock/ paid in cap 7218409.88 8240562.28 9354986.98 9852779.14 11168863.92 Days A/R 38.22 36.75 35.00 34.14 32.92 Days Inventory 86.36 86.72 86.56 87.10 87.22 Days A/P 47.57 44.62 45.81 48.32 46.92 Cash to Sales Ratio 10.18% 10.04% 10.34% 10.60% 11.20% Other Current Assets to sales 14.68% 14.49% 14.26% 14.52% 14.47% Intangible Assets to sales 1.92% 1.85% 1.87% 1.80% 1.79% Other Assets to sales 5.04% 5.20% 5.07% 5.20% 5.25% P/E Ratio 30.10 28.29 27.37 28.47 29.32

69""

Appendix 8: Proforma Financial Statements

Standardized Annual Income Statement

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands

Total Revenue $30,601,000 $31,409,535 $33,730,514 $35,821,745 $37,877,934 $39,502,007 Direct Costs $16,534,000 $17,118,197 $18,787,896 $19,773,603 $21,249,521 $22,081,622 Gross Profit $14,067,000 $14,291,339 $14,942,618 $16,048,142 $16,628,413 $17,420,385 Selling General & Admin $9,892,000 $9,894,004 $10,894,956 $10,889,811 $11,969,427 $12,166,618 Other Operating Expense -$58,000 $96,345 $75,491 -$56,664 $11,144 $83,663 Total Indirect Operating Costs $9,834,000 $9,990,349 $10,970,447 $10,833,147 $11,980,572 $12,250,281 Operating Income (EBIT) $4,233,000 $4,300,990 $3,972,171 $5,214,995 $4,647,842 $5,170,104 Interest Income -$28,000 -$84,963 -$130,547 -$120,028 -$143,758 -$148,591 Earnings Before Tax $4,205,000 $4,216,027 $3,841,623 $5,094,967 $4,504,084 $5,021,512 Taxation $932,000 $982,334 $887,415 $1,227,887 $1,126,021 $1,235,292 Earnings After Tax $3,273,000 $3,233,693 $2,954,208 $3,867,080 $3,378,063 $3,786,220 Discontinued Operations $0 $0 $0 $0 $0 $0 Extraordinary Items $0 $0 $0 $0 $0 $0 Accounting Changes $0 $0 $0 $0 $0 $0 Net Income $3,273,000 $3,233,693 $2,954,208 $3,867,080 $3,378,063 $3,786,220

Standardized Annual Retained Earnings

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands

Retained Earnings at Start $4,871,000 $4,685,000 $4,944,653 $4,269,679 $4,064,874 $3,124,950 Net Income $3,273,000 $3,233,693 $2,954,208 $3,867,080 $3,378,063 $3,786,220 dividends on common stock $931,000 $771,040 $876,183 $967,884 $1,016,987 $1,073,633 Repurchase of class B common stock $2,525,000 $2,200,000 $2,750,000 $3,100,000 $3,300,000 $2,850,000 Forfeiture of shares from employees $3,000 $3,000 $3,000 $4,000 $1,000 $2,000 Retained Earnings at End $4,685,000 $4,944,653 $4,269,679 $4,064,874 $3,124,950 $2,985,537

Standardized Annual Balance Sheet

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands

Cash $3,852,000 $5,130,513 $3,970,071 $5,649,814 $4,752,965 $6,211,576 Accounts Receivable $3,358,000 $3,219,500 $3,572,364 $3,297,110 $3,789,510 $3,336,003 Inventories $4,337,000 $3,763,093 $5,164,630 $4,213,743 $5,927,284 $4,626,266 Other Current Assets $4,429,000 $4,790,848 $4,982,216 $5,234,085 $5,765,819 $5,668,842 Total Current Assets $15,976,000 $16,903,954 $17,689,281 $18,394,751 $20,235,579 $19,842,687 Gross Property Plant & Equip $6,352,000 $8,396,611 $8,748,701 $9,197,965 $9,686,301 $10,483,283 Accumulated Depreciation $3,341,000 $3,798,876 $4,037,357 $4,317,581 $4,590,407 $4,917,367 Net Property Plant & Equip $3,011,000 $4,597,735 $4,711,344 $4,880,384 $5,095,894 $5,565,916 Intangible Assets $412,000 $794,193 $455,874 $882,897 $477,641 $940,264

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Standardized Annual Balance Sheet

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands Other Assets $2,201,000 $967,804 $2,538,361 $1,091,957 $2,848,835 $1,297,108 Total Long term Assets $5,624,000 $6,359,731 $7,705,579 $6,855,238 $8,422,370 $7,803,288 Total Assets $21,600,000 $23,263,685 $25,394,859 $25,249,989 $28,657,948 $27,645,975 Liabilities and Shareholders’ Equity: Current Liabilities: Accounts Payable $2,131,000 $2,178,712 $2,006,570 $2,709,449 $2,525,951 $2,937,214 Notes payable $74,000 $183,000 $304,000 $168,000 $359,000 $243,000 Other Current Liabilities $4,129,000 $3,133,650 $4,897,316 $3,732,638 $5,519,264 $4,454,162 Total Current Liabilities $6,334,000 $5,495,362 $7,207,886 $6,610,087 $8,404,215 $7,634,376 LT Debt & Leases $1,079,000 $3,410,717 $3,572,388 $2,799,675 $4,810,814 $3,311,241 Other Liabilities $1,480,000 $1,794,715 $1,752,644 $1,961,342 $2,019,476 $1,998,488 Total Liabilities $8,893,000 $10,700,793 $12,532,917 $11,371,104 $15,234,504 $12,944,105 common stock and paid in capital $6,776,000 $7,218,410 $8,240,562 $9,354,987 $9,852,779 $11,168,864 Retained Earnings $4,685,000 $4,944,653 $4,269,679 $4,064,874 $3,124,950 $2,985,537 Other Equity $1,246,000 $399,829 $351,701 $459,024 $445,715 $547,469 Total Equity $12,707,000 $12,562,892 $12,861,942 $13,878,885 $13,423,445 $14,701,870 Total Liabilities & Equity $21,600,000 $23,263,685 $25,394,859 $25,249,989 $28,657,948 $27,645,975

Balance Sheet Balanced? $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Standardized Annual Cash Flows

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands

Net Income $3,273,000 $3,233,693 $2,954,208 $3,867,080 $3,378,063 $3,786,220 Depreciation $606,000 $674,248 $724,705 $749,437 $774,973 $822,993 Decrease (Increase) in Inventory -$390,000 $573,907 -$1,401,536 $950,887 -$1,713,542 $1,301,018 Decrease (increase) in A/R $76,000 $138,500 -$352,864 $275,254 -$492,400 $453,507 Increase (decrease) In A/P $201,000 $47,712 -$172,141 $702,879 -$183,498 $411,263 Capital Gain (Loss) on Sale of PPE $0 $0 $0 $0 $0 $0 Other Prepaid Expenses $914,000 $777,990 $786,697 $748,140 $917,192 $625,935 Cash Flow from Operations $4,680,000 $5,446,050 $2,539,068 $7,293,676 $2,680,787 $7,400,937 Purchase of Pty Plant & Equip -$963,000 -$750,853 -$943,022 -$849,442 -$949,869 -$1,197,043 Purchase of Investments -$5,086,000 -$5,067,500 -$4,733,025 -$4,847,584 -$4,907,163 -$4,902,814 Proceeds from Pty Plant & Equip $3,000 $0 $0 $0 $0 $0 Disposal of Investments $5,871,000 $6,398,100 $5,000,060 $3,681,696 $5,441,764 $3,700,992 Other Investing Cash Flows $0 -$2,500 -$4,500 $400,000 $0 -$14,000 Cash Flow from Investing -$175,000 $577,247 -$680,487 -$1,615,330 -$415,268 -$2,412,865 Change in ST Debt -$63,000 $109,000 $121,000 -$136,000 $191,000 -$116,000 Change in LT Debt -$26,000 $2,331,717 $161,671 -$772,712 $2,011,138 -$1,499,572 Change in Equity -$1,802,000 $144,108 -$299,050 -$1,016,943 $455,440 -$1,278,425 Payment of Dividends -$899,000 -$771,040 -$876,183 -$967,884 -$1,016,987 -$1,073,633

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Standardized Annual Cash Flows Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands Cash Flow from Financing -$2,790,000 $1,813,785 -$892,562 -$2,893,540 $1,640,592 -$3,967,631 Effect of Exchange Rate -$83,000 -$52,000 $17,000 $5,400 -$22,300 $8,000 Change in Cash $1,632,000 $7,785,082 $983,019 $2,790,207 $3,883,811 $1,028,441 Opening Cash $2,220,000 $3,852,000 $5,130,513 $3,970,071 $5,649,814 $4,752,965 Closing Cash $3,852,000 $11,637,082 $6,113,532 $6,760,278 $9,533,625 $5,781,406

Standardized Annual CS Balance Sheet

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands Cash 17.83% 22.05% 15.63% 22.38% 16.59% 22.47% Accounts Receivable 15.55% 13.84% 14.07% 13.06% 13.22% 12.07% Inventories 20.08% 16.18% 20.34% 16.69% 20.68% 16.73% Other Current Assets 20.50% 20.59% 19.62% 20.73% 20.12% 20.51% Total Current Assets 73.96% 72.66% 69.66% 72.85% 70.61% 71.77% Gross Property Plant & Equip 29.41% 36.09% 34.45% 36.43% 33.80% 37.92% Accumulated Depreciation 15.47% 16.33% 15.90% 17.10% 16.02% 17.79% Net Property Plant & Equip 13.94% 19.76% 18.55% 19.33% 17.78% 20.13% Intangible Assets 1.91% 3.41% 1.80% 3.50% 1.67% 3.40% Other Assets 10.19% 4.16% 10.00% 4.32% 9.94% 4.69% Total Long-term Assets 26.04% 27.34% 30.34% 27.15% 29.39% 28.23% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Liabilities and Shareholders’ Equity: Current Liabilities: Accounts Payable 9.87% 9.37% 7.90% 10.73% 8.81% 10.62% Notes payable 0.34% 0.79% 1.20% 0.67% 1.25% 0.88% Other Current Liabilities 19.12% 13.47% 19.28% 14.78% 19.26% 16.11% Total Current Liabilities 29.32% 23.62% 28.38% 26.18% 29.33% 27.61% LT Debt & Leases 5.00% 14.66% 14.07% 11.09% 16.79% 11.98% Other Liabilities 6.85% 7.71% 6.90% 7.77% 7.05% 7.23% Total Liabilities 41.17% 46.00% 49.35% 45.03% 53.16% 46.82% common stock and paid in capital 31.37% 31.03% 32.45% 37.05% 34.38% 40.40% Retained Earnings 21.69% 21.25% 16.81% 16.10% 10.90% 10.80% Other Equity 5.77% 1.72% 1.38% 1.82% 1.56% 1.98% Total Equity 58.83% 54.00% 50.65% 54.97% 46.84% 53.18% Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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Standardized Annual CS Income Statement

Report Date 5/31/2015 5/31/2016 5/31/2017 5/31/2018 5/31/2019 5/31/2020 Scale Thousands Thousands Thousands Thousands Thousands Thousands

Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Direct Costs 54.03% 54.50% 55.70% 55.20% 56.10% 55.90% Gross Profit 45.97% 45.50% 44.30% 44.80% 43.90% 44.10% Selling General & Admin 32.33% 31.50% 32.30% 30.40% 31.60% 30.80% Other Operating Expense -0.19% 0.31% 0.22% -0.16% 0.03% 0.21% Total Indirect Operating Costs 32.14% 31.81% 32.52% 30.24% 31.63% 31.01% Operating Income (EBIT) 13.83% 13.69% 11.78% 14.56% 12.27% 13.09% Interest Income -0.09% -0.27% -0.39% -0.34% -0.38% -0.38% Earnings Before Tax 13.74% 13.42% 11.39% 14.22% 11.89% 12.71% Taxation 3.05% 3.13% 2.63% 3.43% 2.97% 3.13% Earnings After Tax 10.70% 10.30% 8.76% 10.80% 8.92% 9.58% Discontinued Operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Extraordinary Items 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accounting Changes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net Income 10.70% 10.30% 8.76% 10.80% 8.92% 9.58%

Appendix 9: Expected Return Models Appendix 9A: CAPM Regression Output

Coefficients Standard

Error t Stat P-value Confidence Intercept 0.01436 0.00778 1.84555 0.07006 0.92994 Rm-Rf 0.59493 0.21516 -1.88264 0.06477 0.93523

*Rm-Rf p-value/confidence reflect a test for Ho: β≠1

Appendix 9B: FF3 Regression Output

Coefficients Standard

Error t Stat P-value Confidence Intercept 0.01137 0.00782 1.45446 0.15140 0.84860 Rm-Rf 0.65893 0.22512 -1.51503 0.13520 0.86480 Rsize -0.27780 0.36244 -0.76648 0.44661 0.55339 Rb/m -0.82957 0.42534 -1.95039 0.05614 0.94386

*Rm-Rf p-value/confidence reflect a test for Ho: β≠1

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Appendix 9C: CAPM/ Fama French Regression Inputs

*First and last 12 months of data

NKE-rf" Rm-Rf" Rsize" Rb/m"201512" -0.05272" -0.0217" -0.0298" -0.0205"201511" 0.00954" 0.0056" 0.0355" -0.0123"201510" 0.065544" 0.0775" -0.0186" -0.0032"201509" 0.101655" -0.0307" -0.0271" 0.0073"201508" -0.03012" -0.0604" 0.0043" 0.0288"201507" 0.066654" 0.0154" -0.0417" -0.045"201506" 0.062457" -0.0153" 0.0284" -0.0104"201505" 0.030049" 0.0136" 0.0095" -0.019"201504" -0.01485" 0.0059" -0.0303" 0.0213"201503" 0.033052" -0.0112" 0.0314" -0.0073"201502" 0.054309" 0.0613" 0.0047" -0.0216"201501" -0.04056" -0.0311" -0.0062" -0.0306"201112" 0.002911" 0.0074" -0.0055" 0.0157"201111" -0.00176" -0.0028" -0.0024" -0.0018"201110" 0.126769" 0.1135" 0.0358" -0.0096"201109" -0.01226" -0.0759" -0.0372" -0.0098"201108" -0.03892" -0.0599" -0.033" -0.0158"201107" 0.001889" -0.0236" -0.0144" -0.0118"201106" 0.0664" -0.0175" -0.0014" -0.0026"201105" 0.025875" -0.0127" -0.0068" -0.0212"201104" 0.087451" 0.029" -0.0034" -0.0215"201103" -0.14895" 0.0045" 0.0268" -0.0116"201102" 0.079313" 0.0349" 0.0162" 0.0173"201101" -0.03452" 0.0199" -0.024" 0.0068"

Appendix 10: 3 Statement DCF Appendix 10A: DCF with CAPM return

CAPM Fair Discount Rate 6.63%

(CF’s in thousands)

PV of CF's in: 2016 3,801,722.00

PV of CF's in: 2017 831,319.29

PV of CF's in: 2018 5,036,032.66

PV of CF's in: 2019 777,401.48

PV of CF's in: 2020 4,535,968.58

PV of CFs Generated 2021 to infinity: 194,242,480.27

PV of Assets: 209,224,924.28

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Less Total Debt: -8,893,000.00

PV of Equity 200,331,924.28

Shares Outstanding: 1,350,000.00

Fair Value of Stock Per Share: $148.39

Actual Price of Stock: 62.18

Pct Stock Over (Under) Valuation: -58.10%

NPV of the stock per share: $86.21

Appendix 10B: DCF with FF3 Return

Fama French Fair Discount Rate 4.66%

(CF’s in thousands)

PV of CF's in: 2016 3,843,219

PV of CF's in: 2017 848,463

PV of CF's in: 2018 5,206,119

PV of CF's in: 2019 807,614

PV of CF's in: 2020 4,787,294

PV of CFs Generated 2021 to infinity: 386,876,999

PV of Assets: 402,369,707

Less Total Debt: -8,893,000

PV of Equity 393,476,707

Shares Outstanding: 1,350,000.00

Fair Value of Stock Per Share: $291.46

Actual Price of Stock: 62.18

Pct Stock Over (Under) Valuation: -78.67%

NPV of the stock per share: $229.28

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Appendix 11: Dividend Discount Model Appendix 11A: DDM with CAPM return

Fair Discount rate 6.631%

Time 5/31/16 5/31/17 5/31/18 5/31/19 5/31/20 5/31/21 5/31/22 5/31/23 5/31/24 5/31/25 5/31/26

ROE 0.041 0.044 0.056 0.046 0.052 0.051 0.049 0.052 0.050 0.050 0.053

PB 0.762 0.704 0.750 0.699 0.716 0.700 0.678 0.670 0.650 0.600 0.600

BV 9.780 10.288 11.449 11.414 12.782 12.835 12.813 12.823 12.800 12.787 12.778

PAT 0.302 0.434 0.576 0.527 0.589 0.648 0.631 0.666 0.641 0.640 0.678

Ret Earnings 0.230 0.331 0.405 0.395 0.412 0.464 0.442 0.452 0.430 0.416 0.407

Dividends 0.593 0.692 0.788 0.852 0.920 0.993 1.073 1.148 1.228 1.294 1.336

Growth 14.00% 16.67% 14.00% 8.00% 8.00% 8.00% 8.00% 7.00% 7.00% 5.40% 3.18%

PV $28.11

Appendix 11B: DDM with FF3 return

Fair Discount rate 4.659%

Time 5/31/16 5/31/17 5/31/18 5/31/19 5/31/20 5/31/21 5/31/22 5/31/23 5/31/24 5/31/25 5/31/26

ROE 0.041 0.044 0.056 0.046 0.052 0.051 0.049 0.052 0.050 0.050 0.053

PB 0.762 0.704 0.750 0.699 0.716 0.700 0.678 0.670 0.650 0.600 0.600

PO 0.238 0.296 0.250 0.301 0.284 0.300 0.322 0.330 0.350 0.400 0.400

BV 9.780 10.288 11.449 11.414 12.782 12.835 12.813 12.823 12.800 12.787 12.778

PAT 0.302 0.434 0.576 0.527 0.589 0.648 0.631 0.666 0.641 0.640 0.678

Ret Earnings 0.230 0.331 0.405 0.395 0.412 0.464 0.442 0.452 0.430 0.416 0.407

Dividends 0.593 0.692 0.788 0.852 0.920 0.993 1.073 1.148 1.228 1.294 1.336

Growth 14.00% 16.67% 14.00% 8.00% 8.00% 8.00% 8.00% 7.00% 7.00% 5.40% 3.18%

PV $66.81

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Appendix 12: Comparables

Firm Price/Share EPS P/E Growth1rate1of1EarningsPEG Sales/Share P/S Growth1rate1of1SalesPSG BV1Eq P/B

Nike 61.59$1111111 1 2.12$ 1 29.121 11.50% 2.53 18.36$1111111 1 3.355 10.50% 0.32 7.41$111111111 1 8.31

Deckers 56.56$1111111 1 4.60$ 1 12.296 11.50% 1.07 56.81$1111111 1 0.996 23.00% 0.04 28.15$1111111 1 2.01

Steven1Madden 35.20$1111111 1 1.82$ 1 19.341 25.50% 0.76 23.83$1111111 1 1.477 22.00% 0.07 10.52$1111111 1 3.35

Sketchers 32.92$1111111 1 1.52$ 1 21.658 1.50% 14.44 20.67$1111111 1 1.593 4.50% 0.35 8.64$111111111 1 3.81

Under1Armour 83.69$1111111 1 1.08$ 1 77.491 22.50% 3.44 18.39$1111111 1 4.551 24.00% 0.19 7.72$111111111 1 10.84

Adidas 54.94$1111111 1 1.47$ 1 37.374 14.00% 2.67 42.22$1111111 1 1.301 15.54% 0.08 16.32$1111111 1 3.37

Average 32.8799 4.1520 2.2120 0.1762 5.2807