Nike Cost of Capital Essay

Kimi Ford a portfolio managing director at NorthPoint Group which is a mutual-fund management firm, is considering to buy more or less make outs from Nike, inc even if its share bell had setd from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the decline in the stock market over the last 18 months. Kimi therefore surveyed the results of Nikes fiscal-year 2001which had been revealed a workweek earlier.Issues that caused a decline in market sales as revealed by the management of Nike 1. Revenues since 1997 had stopped maturement but remained around $9. 0 billion. 2. The net income had fallen from $800m to $580m a decline of $220 million. 3. Nikes market share in the U. S. athletic shoe industry had fallen from 48 pct in 1997 to 42 percent in 2000 (6% decline) 4. The issue of Supply-chain and strong dollar exchange rate overly affected the revenue negatively. Nikes Strategic plan to address the above issues1. Increase revenues by wearing more athletic-shoe products in the mid-priced range. 2. thrusting its apparel line which had performed tremendously well. 3. Exert more expense control on the cost side. 4. Nikes executives expressed their interest to continue with the long-term revenue growth target of 8 to 10 percent and earnings-growth targets of above 15 percent. Although the management presented its plan to improve on its performance, there were mixed reactions from the third troupe analysts.Kimi Ford was also not satisfied with the Nikes analysis therefore she decided that it was necessary to develop her own discounted-cash-flow forecast. She found that Nike was over evaluated at the discounted rate of 12% at its current share price of $42. 09. She also did a quick sensitivity analysis which revealed that Nike was undervalued at discounted rates below 11. 17%. In smart set for Kimi to make a proper investment decision for her Fund, she asked J oanna Cohen to calculate the cost of capital. However there were some problems. Cohens calculation of cost of capital.She used single cost of capital for the apparel and footwear lines presumptuous that they are sold through the same marketing and distribution channels and are often marketed in other collections of similar designs. WACC (Weighted Average Cost of capital of the United States) WACC is calculated using weighted averages of debt (Kd) and equity (We) Cohen used Capital Asset Pricing Model (CAPM) to calculate WACC 0f 8. 4 % however, she used the book values yet weights should be based on the market value. Her result of $3,494. 5 for the Equity was wrong. The formula for calculating the Market value of equity is E = stock Price x Number of shares outstanding .