Documente Academic
Documente Profesional
Documente Cultură
MM5007
Case Study
Nike, Inc.: Cost of Capital
Syndicate 6
29113385
Faris Hizrian
29113543
29113529
29113323
Silvia Regina
29113357
Yuthika Fauziyyah
1. INTRODUCTION
Kimi Ford who is a portfolio manager at NorthPoint Group, a mutual-fund
management firm which invested mostly in Fortune 500 companies with an emphasis on
value investing, considering to buying some shares of Nike for the fund she managed.
Since the beginning of 2001, Nikes share price had decline significantly. While the stock
market had decline over 18 months, NorthPoint Large-Cap Fund had performed
extremely well and earned a return of 20.7% even as the S&P 500 fell 10.1%.
On June 2001 Nike held an analysts meeting to disclose its fiscal year 2001 result
that is to communicate a strategy for revitalizing the company. Since 1997, its revenues
had plateaued at around $9 billion, while net income had fallen from 48% in 1997 to 42%
in 2000, in addition recent supply-chain issues and the adverse effect of a strong dollar
had negatively affected revenue.
At the meeting, management revealed plans to address both top-line growth and
operating performance. To boost revenue, the company would develop more athletic-shoe
products in the midprice segment, push its apparel line. On the cost side, Nike would
exert more effort on expense control. Finally, company executives reiterated their longterm revenue-growth targets of 8% to 10% and earnings-growth targets of above 15%.
The report from Lehman Brothers recommended a strong buy, while UBS Warburg and
CSFB analyst expressed misgivings about the company and recommended a hold. Ford
decided instead to develop her own discounted cash flow forecast to come to a clearer
conclusion.
Her forecast showed that, at a discount rate of 12%, Nike was overvalued at its
current share price of S42.09. However, she had done a quick sensitivity analysis that
revealed Nike was undervalued at discount rates below 11.17%. The purpose of this case
is to discussing Nikes cost of capital.
2. ANALYSIS
Cost of Debt
Cost of Equity
CAPM formula used in finding cost of equity is: KE=Krf + (Km-Krf).
RF
Rm
b
CAPM
Joanna Cohen
5,74%
5,90%
0,80
10,5%
Syndicate 6
5,74%
5,90%
0,69
9,8%
Cost of Capital
Kd(1-t) or CoD
D/(D+E)
1-tax
Ke or CoE
E/(D+E)
WACC
Joanna Cohen
2,7%
27%
10,5%
73%
8,4%
Syndicate 6
7,17%
10,19%
61,94%
9,81%
89,81%
9,26%
Total Equity
Debt balance
= $1.296,60
Total Equity
100
(Total Equity+ Debt Balance)
= ($11.427,44 / ($11.427,44 + $1.296,60)) x 100%
= 89,81%
WACC
Joanna Cohen
Cost of Debt (CoD)
Joanna estimate Nike CoD using:
CoD=
Syndicate 6
Cost of Debt (CoD)
We calculate cost of debt by finding the yield to maturity (YTM) on Nike Inc. debt
with a 6.75% coupon semi-annually, with term 20 year, current price $ 95.60, and the
result is 7.17%. Joanna Cohen calculation didnt consider the current condition as the
cost of debt calculation. This calculation is not valid because we dont have enough
information about the debt balance in detail.