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Case Study Assignment
FIN 631: Managerial Finance – Nike, Inc. Case Study
Dr. Dana Leland
February 20, 2011
Abstract
Nike, Inc. is an athletic shoe manufacturer. NorthPoint Group, a mutual fund management firm, is trying to decide whether to invest in Nike, Inc., since its share price declined significantly in mid-2001. During that same time period, Nike management communicated their plans for revitalizing the company. Plans included the following components:
• Develop a line of mid-priced athletic footwear
• Push the apparel line
• Long-term growth target of 8 – 10%
• Earnings growth target of 15%
• Tighten control of expenses
In this analysis, we will focus on the cost of capital for Nike, Inc. and its significance on company sustainability and future investors, such as NorthPoint. We will examine the calculation of Weighted Average of Cost of Capital (WACC) for Nike Inc., as well as three alternative methods for calculating cost of equity: Capital Asset Pricing Model (CAPM); Dividend Discount Model (DDM); and Earnings Capitalization Model (EPS). Finally, we will make a recommendation as to whether NorthPoint Group should invest in Nike, Inc.
Case Study "Nike"
I. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanne Cohen’s WACC calculation? Why or why not? Explain.
The weighted average cost of capital (WACC) is one method of determining an estimated cost of capital. It is the rate that a company is expected to pay debt holders (cost of debt) and
shareholders (cost of equity) to finance its assets. It is the minimum return that a company must earn on their existing asset base to satisfy its creditors, owners, and other providers of capital.
Companies raise money from a number of sources and different securities are expected to generate different returns. WACC is calculated taking into account the relative weights of each component of the...