Nike Case

Introduction

Nike is known as one of the premier brands in athletic shoes around the world. Unfortunately, there is a cause for concern being that Nike’s share prices has seen significant declines. Nike recruited a portfolio manager from a mutual-fund management firm to analyze the data.

Kimi Ford is a portfolio manager at NorthPoint Group who reviewed Nike’s cost of capital on July 5, 2001. She did this because Nike’s share price had declined significantly from the beginning of 2001. On June 28, 2001, Nike held an analysts’ meeting to disclose their fiscal year 2001 results. At this meeting Nike’s management wanted to communicate a strategy for revitalizing the company. Nike’s market share in athletic shoes in the U.S. had fallen 6% in three years.

Qualitative Analysis

During this meeting management revealed plans to address top-line growth and operating performance. They had decided to develop more athletic-shoe products in the mid-price segment since this segment had been overlooked in recent years and they also planned to push its apparel line which had been previously performing well. Company executives want long-term revenue growth to fall between 8% and 10% but also see their earnings growth target at about 15%. Some analysts felt these predictions were too aggressive which is where Ms. Ford came in to help.

Ms. Ford’s forecast showed that at a discount rate of 12%, Nike would be overvalued at its current share price of $42.09 but she felt that below 11.17% the stock would be undervalued. Ms. Ford asked her assistant Joanna Cohen to estimate Nike’s cost of capital. Ms. Cohen’s conclusion was that Nike’s cost of capital should be 8.4%.

Quantitative Analysis

Exhibit 2 from the case study in the attachments following this analysis proves that by using a 12.0% discount rate, the current share price is overvalued. This exhibit also proves that anything below an 11.17% discount rate would be undervalued at this price. When...