Case 14 Nike

Case 14 – Nike

Background/Facts

Kimi Ford, is a portfolio manager at NorthPoint Group, which is a large mutual fund management firm. This case takes place on July 5, 2001. As an investment option, Kimi is considering investing in Nike. Kimi has noticed that Nike’s share price has declined significantly since the beginning of the year. She thinks this maybe has created a buy opportunity. Kimi manages a large-cap mutual fund which in the previous year had a return of 20.7% even though the S&P 500 fell 10.1%. She has tough standards and criteria that her investments have to meet. Nike had sparked her interest after reading that a week earlier Nike had there analyst’s meeting to disclose its fiscal year 2001 results. This meeting also had another purpose which was to communicate a new strategy to revitalize the company. Nike’s market share had fallen 6% in 3 years.

The strategy was to develop more athletic shoe products in the mid-priced segment. Nike also planned to push its apparel line which was performing well. As Kimi was reading through the reports, she was trying to figure out the cost of capital. Unable to find, she asked her assistant, Joanna Cohen to come up with an estimate for cost of capital. Joanna came up with an estimate for cost of capital of 8.4%. In order to come up with this number she had to use some assumptions. The first was deciding between single or multiple costs of capital. The second was methodology for calculating the cost of capital, the method used was weighted average cost of capital. The third was to determine the Cost of Debt.

Analysis/Decision

Based on a cost of capital rate of 8.4%, I think the stock is undervalued. Before we get into that lets discuss the three assumptions Joanna came up with. The first assumption to consider was to use single or multiple costs of capital. Joanna decided to use a single cost of capital number. I would agree with this determination. Most of the apparel...