Submitted by: Submitted by cplncct
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Category: Business and Industry
Date Submitted: 10/02/2016 03:28 PM
Nike Inc.: Cost of Capital
We reviewed Joanna’s memo estimating Nike Inc.’s cost of capital and wanted to
express our thoughts on the methods, assumptions, and conclusions utilized in her analysis.
While we agree with some of the fundamental assumptions & methods, we have concerns
about several others. We agree with using a single cost of capital, as the mix of product lines &
business units don’t represent a material enough variance in risk profile to warrant the
utilization of multiple costs of capital. While there is some risk in expanding the apparel line
and increasing focus on mid-priced shoes, we don’t believe these are substantial. As Joanna
stated, there are some non-Nike-branded product lines, but they represent an immaterial
percentage of revenues. In addition, the growth projections utilized in the analysis are more
conservative than Nike’s, which we believe adjusts for some of the potentially overly optimistic
projections of management.
In calculating the cost of capital we agree that the weighted average cost of capital
(“WACC”) should be deployed for this purpose, but Joanna’s assumptions and subsequent
calculations have several components that are inaccurate and raise additional questions. The
biggest issue lies in Joanna’s calculation of values and weights for debt and equity. Joanna used
book value of equity ($3,494.5) from the Balance Sheet as opposed to market value, where the
current market share price of $42.09 x 273.3 diluted shares outstanding equals approximately
$11,503, a substantial difference. We also disagree with her method of calculating cost of debt.
She divided interest expense by the average of the debt balances on the 2000 and 2001 Balance
Sheets to arrive at a tax-adjusted cost of debt of 2.7%. This method of calculating debt yields
does not accurately reflect Nike’s current and future cost of debt in the market. A better proxy
would be to calculate the current yield to maturity which is 7.1% and...