Nike

Background of North Point Group

A mutual-fund management firm.

It invests money mostly in Fortune 500 companies.

Its top holdings include Exxon mobile, General Motors, McDonalds, 3M and other large-cap.

The stock market declined over the last 18 months.

North Point large-cap Fund performed extremely well.

In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1%

At the end of June 2001, the fund’s year- to-date returns stood at 6.4% versus -7.3% for the S&P 50.

Background of Nike

The athletic-shoe manufacturer since 1997, its revenue had plateaued at around $9 billion.

Net income had fallen from almost $800 million to $580 million.

Market share in U.S. athletic shoes had fallen from 48%, in 1997,to 42% in 2000.

Adverse effect of a strong dollar had negatively affected revenue.

The management is concerned about the top-line growth and operating performance.

To boost revenue, the company would develop more athletic-shoe products in the mid-priced segment - a segment that Nike had overlooked in the recent years.

The company has also planned to push its apparel line.

The company has planned to exert more effort on the expense control.

Long term revenue growth target is 8%-10%.

Earning growth target is 15%.

Problems Identification

Kimi Ford - a portfolio manager for North Point Large-Cap Fund concerned whether or not, it’s worth investing in Nike.

Analysts provided confronting evidence as follow:

Lehman Brothers recommended to invest.

UBS Warburg/CSFB recommended not to invest.

If Nike’s discount rate is 12%, its stock price is overvalued.

If discount rate is < 11.17%, its stock price is undervalued.

Ford needs to calculate the cost of capital to determine whether the investment in Nike should be made or ignored.

Weighted Average Cost of Capital (WACC)

WACC = (Equity x Cost of Equity + Loan x (Post Tax Cost of Loan)) / Total CapitalWACC = (3494,5 x 10,46%) + (435,9 x (5,74% x 62%)) / 3930,4WACC = (365,524 + 15,5) /...