Case 4 : Nike, Inc.
Cost of Capital
Case 4 : Nike, Inc. : Cost of Capital
EXECUTIVE B – 26B : GROUP III
Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya Wicaksono, ST
Andi Onggo Widjono - Arifin Joyodiguno - Johanes Tono Prihartono
M. Saefurahman - Surya Adinata Purba
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AGENDA
CASE SUMMARY
PROBLEM IDENTIFICATION
ALTERNATIVE SOLUTIONS
RECOMMENDATION
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CASE SUMMARY
A mutual-fund management firm
It invests money mostly in Fortune 500
companies
Its top holdings include Exxon mobile, General
Motors, McDonald, 3M and other large-cap
The stock market declined over the last 18
months
NorthPoint large-cap Fund performed
extremely well
In 2000, the fund earned a return of 20.7%, even
as the S&P 500 fell 10.1%
At the end of June 2001, the fund’s year-to-date
returns stood at 6.4% versus -7.3% for S&P 500
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CASE SUMMARY
The athletic-shoe manufacture
Since 1997, its revenues had plateaued at
around $9 billion
Net income had fallen from almost $800
million to $580 million
Market share in U.S athletic shoes had fallen
from 48%, in 1997, to 42% in 2000
Adverse effect of a strong dollar had
negatively affected revenue
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CASE SUMMARY
The management in concerned about the
top-line growth and operating performance
To boost revenue, the company would
develop more athletic-shoe products in the
mid-priced segment- a segment that Nike had
overlooked in the recent years
The company has also planned to push its
apparel line
The company has planned to exert more
effort on expense control
Long term revenue growth target is 8-10%
Earning growth target is 15%
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PROBLEM IDENTIFICATION
Kimi Ford is a portfolio
NorthPoint Large-Cap Fund
manager
for
Ford is concerned whether or not, It’s worth
investing in Nike
Analysts provided confronting evidence ;
Lehman
invest
Brothers
recommended
to
UBS Warburg / CSFB recommended
not to invest
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PROBLEM IDENTIFICATION
If Nike’s discount rate is 12%, it’s stock price
is overvalued
If discount rate is < 11.17%, it’s stock price is
undervalued
Ford needs to calculate the cost of capital to
determine whether the investment in Nike
should be made or ignored
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ALTERNATIVE SOLUTIONS
Cohen calculated a weighted average cost of
capital (WACC) of 8.4 percent by using the
capital asset pricing model (CAPM), but we do
not agree with Cohen’s figure and the reason to
that are as follows :
Value of Equity : 11503.2
Value of Debt : 1296.6
Weighting : Wd = 10.13%
We = 89,87%
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ALTERNATIVE SOLUTIONS
Cost of Debt and Equity
Risk Free rate : 10 year yield on US
Treasuries 5.39%
Market risk premium : Geometric mean
5.9%
Beta (Average) : 0.8
Cost of Debt : 7.17%
Cost of Equity : Rrf = 10,11 %
WACC = wdrd(1 – T) + wpsrps + wsrs = 9.5%
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RECOMMENDATION
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RECOMMENDATION
As per the calculations done and the table
given the stock price at WACC = 9.5% or we can
say close to BUY so the stock price should be $
55.68, which is higher than current stock price $
42.09
These calculation clearly shows that the current
stock of Nike undervalued and is discounted rate
of 11.17
The recommendation is to invest in the Nike, as
the stock is undervalued for the calculated cost of
capital, WACC = 9.5%
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