Nike Executive Summary

NIKE

Executive Summary

Jamal Black

Gretchen Wieners

Elle Woods

Kimi Ford, a fund manager at NorthPoint Group, a mutual-fund-management firm, is looking to find out whether or not Nike is currently a good buy for the portfolio she oversees. Based on Nike’s past, current, and forecasted performance after the board meeting on June 28, Ford constructed a discounted cash flow analysis. At a discount rate of 10%, her estimated intrinsic value was $36.14 per share which overvalued Nike at $42.09 per share. Rushing to a meeting, she asked her assistant, Joanna Cohen, to estimate a cost of capital. After reviewing Cohen’s proposal for the cost of capital, our group found multiple errors.

First off, to calculate WACC you must calculate the cost of debt and the cost of equity. To calculate the cost of equity, Cohen used the CAPM. The CAPM is great for pricing any asset, but it is a one-period model which means short-term rates are the best to use in the model. Cohen’s mistake was that she used the long-term 20-year bond rates of 5.74% and so she subsequently used the geometric risk premium of 5.9% which over estimated her CAPM at 10.5%. For our model, we used the 13-week T-bill rate of 3.59% along with the Arithmetic mean of 7.5% for the risk premium. Cohen used the average beta of .8 in her model which we also used in our CAPM. We calculated a required rate of return of 9.59%.

When calculating the cost of debt, Cohen made the mistake of using the book value of debt rather than the market value. To find the market value of debt, we took the book value of long-term debt and divided it by the par value of bonds and then multiplied it by the current price on the bonds. We came up with a value of approximately $416,000,000. Our yield to maturity was 7.16%, and our after-tax cost of debt was 2.72%. Our debt and equity was approximately $11 billion, therefore our weights for debt and equity were 3.52% and 96.48% respectively.

After finding the cost of debt and the...