Nike Case Paper

Nike Inc: Cost of Capital

Nike Inc. is an American corporation involved in the design and manufacturing of athletic shoes, apparel and equipment. The company was founded in 1964 by Bill Bowerman and Phil Knight and has since flourished into a mammoth of sports related products. Nike is the world’s largest supplier and manufacturer of athletic shoes, apparel and athletic equipment. Nike also sponsors many high-profile athletes and sports teams around the world, with the highly recognized trademarks of "Just Do It" and the Swoosh logo. Nike grew rapidly throughout the 70’s and early 80’s and expanded its product line to encompass many sports and regions throughout the world. In 1990 Nike moved into its eight-building World Headquarters campus in Beaverton, Oregon.

Since 1997 Nike’s revenues had plateaued at around $9 million while net income had fallen by almost $220 million. Their market share in athletic shoes had also fallen from 1997 to 2001. In 2001, a BBC documentary uncovered occurrences of child labor and poor working conditions in a Cambodian factory used by Nike. The documentary focused on six girls, who all worked seven days a week, often 16 hours a day. Nike faced criticism for its use of child labor in the factories used to manufacture their products, and their stock price dropped.

On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, was assigned to the task of deciding whether or not to purchase some shares of Nike stock for the fund she managed. The NorthPoint Large-Cap Fund invested mostly Fortune 500 companies, with emphasis on value vesting. Ford read all the analysts’ reports but they gave her no clear guidance: a Lehman Brothers report recommended a strong buy, while UBS Warburg and CSFB analysts expressed hesitations. Ford instead decided to develop a discounted cash flow forecast which showed that, at a discount rate of 12%, Nike was overvalued at its current share price of $42.09. However, after a quick...