30 MARCH 2023

ESTIMATING ADIDAS’ EQUITY VALUE

ASSIGNMENT 2

DIAA EDDIN SAEED

2013098
 1. If all changes in the book value of equity can be explained through profits and
i i i i i i i i i i i i i i i

dividends, this means that the analysts' predictions are consistent with the clean i i i i i i i i i i i i

surplus assumption. This is a necessary requirement for the equivalence of the

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dividend discount model and the abnormal profits valuation model. i i i i i i i i

2017R 2018E 2019E 2020E

Beginning shareholders' equity i i 6,017 5,977 6,282
Profit/loss 1,620 1,880 2,175
Dividends -1,660 -1,575 -1,702
Ending shareholders' equityi i 6,017 5,977 6,282 6,755

2. Companies with a high Price Earnings Ratio are often considered to be growth stocks. i i i i i i i i i i i i i i

This indicates a positive future performance, and investors have higher expectations for
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future earnings growth and are willing to pay more for them. i i i i i i i i i i

The downside to this is that growth stocks are often higher in volatility, and this puts a lot
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of pressure on companies to do more to justify their higher valuation. For this reason,
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investing in growth stocks will more likely be seen as a risky investment. Stocks with high
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P/E ratios can also be considered overvalued.

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Hence, the analyst expects that the sum of future abnormal profit growth is positive.
i i i i i i i i i i i i i

3.

2017R 2018E 2019E 2020E

Net operating profit after tax
i i i i 1,644 1,916 2,211

Net operating working capital

i i i 2,380 2,620 2,918 2,997
Net non-current operating assets
i i i 4,591 5,013 5,564 5,941
Net operating assets
i i 6,971 7,633 8,482 8,938
Change in net operating assets i i i i 662 849 456

Free cash flow from operations

i i i i 982 1,067 1,755
Free cash flow from operations
i i i i 3,804
 2017R 2018E 2019E 2020E
Net operating profit after tax
i i i i 1,644 1,916 2,211

Net operating working capital

i i i 2,380 2,620 2,918 2,997
Net non-current operating assets
i i i 4,591 5,013 5,564 5,941
Net operating assets
i i 6,971 7,633 8,482 8,938
Beginning net operating assets x 9% i i i i i 627.4 687.0 763.4

Abnormal NOPAT i 1,017 1,229 1,448

Abnormal NOPAT i 3,693

4.

2017R 2018E 2019E 2020E

Abnormal NOPAT i 1,017 1,229 1,448
Discount factor i 0.9174 0.8417 0.7722

Present value of abnormal NOPAT

i i i i 932.7 1,034.4 1,117.8
Beginning net operating assets i i i 6,971
Sum of PV of abnormal NOPAT
i i i i i
3,084.9

Value of net operating assets

10,055.9
i i i i i

(End 2017) i

Our estimate is much lower than the analyst's estimate, primarily because our assumption that
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abnormal profits is zero after 2020. Although it is reasonable to expect that competition will
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drive down Adidas' abnormal NOPAT in the future, it is not likely that this will happen
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overnight. Hence, it is necessary to include an estimate of the value of Adidas' post-2020

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abnormal NOPAT in our calculations, i.e., the terminal value.

i i i i i i i i i

5. The total present value of Adidas's FCFOs between 2018 and 2020 is not equal to the
i i i i i i i i i i i i i i i i

value calculated under question 4 because the assumption that abnormal NOPAT is
i i i i i i i i i i i i

zero beyond the terminal year does not imply that FCFOs are zero beyond the terminal
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year. In fact, in the free cash flow model, the terminal cash flow is equal to the
i i i i i i i i i i i i i i i i i

terminal value of net operating assets. Under the assumption that abnormal NOPAT i i i i i i i i i i i i

equals zero, the terminal value of net operating assets must be equal to the book value i i i i i i i i i i i i i i i i

of net operating assets at the end of the forecast horizon.

i i i i i i i i i i
 2017R 2018E 2019E 2020E
Free cash flow from operations
i i i i 982 1,067 1,755
Discount factor i 0.9174 0.8417 0.7722

Present value of FCFO i i i 900.9 898.1 1,355.2

Sum of PV of FCFO
i i i i 3,154.2
PV of ending net operating assets in 2020
i i i i i i i
6,901.8 (=8,938 / 1.093)
i i

Total 10,055.9