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Date Submitted: 07/27/2013 01:46 PM
Nike, Inc. Cost of Capital Case Analysis
07/23/2013
Nike, Inc Case Background
Kimi Ford, a portfolio manager at NorthPoint Group who managed the Large-Cap fund which invested in Fortune 500 companies, was considering buy some shares for her fund in 2001 while Nike’s stock price had a significant decline.
She decided to develop her own cash flow forecast to make conclusion about whether buy the stock or not, and also ask her assistant to estimate Nike’s Cost of Capital.
According to Kimi Ford’s assistant assumption for the cost of debt 4.3%, cost of equity 10.5% and weighted-average cost of capital 8.4%.
Nike’s Solution
Nike has experienced declines in profits, sales growth and market share since 1996 to 2001. In order to solve the issue, Nike commits to cut expenses and increase the exposure in mid-priced segment and also plans to push its apparel line.
Whether to use WACC or not for the estimates
The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk.
Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC.
As Kimi’s assistant we should use WACC because Nike’s capital is consisted of debt and equity. However there are some issues that how her assistant calculated the cost of debt, the cost of equity and WACC estimates.
Market value of Debt and Cost
Rather than using the previous year outstanding shares we need to use current outstanding shares to keep the estimation current and more accurate for future valuations. Exhibit 1 and 2
show weights of capital components.
|Exhibit 1 | |
|current share price |$42.09...