Nike Cost of Capital Essay Example for Free

Nike Cost of Capital EssayKimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shargons from Nike, inc even if its share price had declined 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 swell up 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 week earlier. Issues that caused a decline in market sales as revealed by the management of Nike 1. Revenues since 1997 had stopped growing 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 percent in 1997 to 42 percent in 2000 (6% decline) 4. The issue of Supply-chain and unfaltering dollar exchange rate also affected the revenue negatively. Ni kes Strategic plan to address the above issues1. Increase revenues by developing more than athletic-shoe products in the mid-priced range. 2. Push its apparel line which had performed tremendously well. 3. Exert more expense control on the monetary value side. 4. Nikes executives expressed their interest to spread over 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 coalesce reactions from the third party 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 overvalued 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 order for Kimi to make a proper investment decision fo r her Fund, she asked Joanna 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 assuming 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) WACC is calculated using weighted averages of debt (Kd) and equity (We) Cohen used Capital Asset Pricing instance (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 cipher the Market value of equity is E = stock Price x Number of shares outstanding .