Nike Case

Nike, Inc.

~ Case Analysis ~

I. Executive Summary

Kimi Ford, a portfolio manager of a large mutual-fund management firm, was recently presented with the difficult task of deciding whether or not Nike should be added to the fund she heads. Nike has been struggling as of late, with their revenues stagnant and their net income and market share falling in recent years. This, along with other factors, has resulted in a decline in the share price of Nike stock. However, management recently unveiled a plan for revitalizing the company. The plan includes an increased focus in the mid-priced shoe market, a greater push in Nike’s apparel line, and efforts to cut expenses. With the new strategy in place, it seems as if Nike has the potential to be a profitable addition to Ms. Ford’s fund. Ms. Ford read through all the analyst estimates she could find, however with so many conflicting opinions, they gave her no clear guidance. To find out if this should be undertaken as an investment, she requested her assistant, Joanna Cohen, estimate Nike’s cost of capital. First, it must be determined if Joanna was accurate in her financial analysis of Nike. If so, should Ms. Ford recommend an investment in the company?

II. Problems

1. Is Joanna’s WACC calculation correct?

Joanna calculated a weighted average cost of capital of 8.4 percent by using the capital asset pricing model for Nike. However, I believe some of the methods she used and the subsequent results are incorrect. Joanna’s first mistake was that she used the book values for both debt and equity in order to calculate WACC. Market values would have been more appropriate for the analysis, as they are more precise than older, historical book values. Using the book values, she calculated a debt proportion of 27% and an equity proportion of 73%. Whereas using the market value of equity for Nike, I found the debt proportion to be 10.19% and the equity proportion to be 89.81% (see appendix), which is quite a...