Frl 440 Nike Inc UPDATE

Topics: Stock market, Stock, Investment Pages: 24 (864 words) Published: February 8, 2015
Nike Inc.
Cost of Captial
Michael Tjandra
Anna
Ellie Du

Background of Nike and North - Point
Nike

North-Point

Revenue $9 Billion from 1997

Mutual Fund Management Firm

Net income fallen from $800
Million to $580 Million

Invests in fortune 500
companies

Market Share fallen from 48%
(1997) to 42% (2000)

At end of June 2001, fund’s year
to date returns tops at 6.4%

Long term revenue targeted at
8-10%

Funds performed extremely well

Earning growth is targeted at
15%

The stock market in decline for
18 months

Adverse effect of strong dollar
had negative effects on revenue

Nike Inc. BackGround


Headquarters : Beaverton Oregon
Founded January 25, 1964



Since 1997



◦ Net income has fallen from $800 million to $580
million
◦ Revenue tops around $9 million


Market shares in U.S athletic shoes down
◦ 48% in 1997
◦ 42% in 2000

Case Background
● NorthPoint Large Cap Fund deciding whether to buy
Nike’s stock.
● Nike experienced sales growth decline.
● Nike has reveal that it would increase exposure in
footwear and apparel lines. It also commits to cut down
expenses.
● Long term revenue growth target 8%-10%
● Earning growth target 15%

● The market responded mixed signals to Nike’s
changes.
● Kimi Ford, portfolio manager for NorthPoint Large
Cap Fund, has done a cash flow estimation.
● Is Nike stock worth investing?

● Ask her assistant, Joanna Cohen to estimate cost
of capital
● Lehman Brothers recommended to invest
● UBS Warburg/ CSFB recommended not to invest

What is WACC?
 WACC methodology is used to discount future cash flows allowing us to use the information for present decisions that will benefit the company in the future.
 WACC is estimated using present and past information, therefore it varies depending on the information being used
 WACC set by investors and market
◦ Not by Managers
 The estimated WACC sets the least amount of returns that the investor needs in order to either break even or have profits.

Analysis


Considering the fact that
◦ Discount rate 12% = stock price overvalued
◦ Discount rate 11.17% = stock price undervalued

Joanna’s cost of capital of Nike = 8.4%
 COMPARE OURS


Cohen’s Mistakes
Weights of Debt and Equity
 Cost of Debt
 Cost Equity


Single or Multiple Cost


Single cost is preferred for this analysis due
to all segments in the company fall under
similar risk therefor one cost of capital will
suffice.

DEBT/EQUITY RATIO
MARKET VALUE OF EQUITY

TOTAL DEBT (EXHIBIT 3&4)

SHARES OUTSTANDING

271.5

5.4

MARKET SHARE PRICE

42.09

CURRENT LONG TERM
DEBT

MARKET VALUE OF
EQUITY

11427.4
3

NOTES PAYABLE

855.3

LONG TERM DEBT

435.9

REDEEM PREFERRED
STOCK

0.3

TOTAL DEBT

$1296.
90

VALUE OF THE FIRM = TOTAL DEBT + TOTAL
EQUITY
VALUE OF THE FIRM

$12724.33

WEIGHT OF DEBT

0.1019

WEIGHT OF EQUITY

0.8981

Cost of Debt





It is the the total amount of interest paid by the company on all debts.
Two Types
Coupon Rate
6.75% Semi –
Exhibit 4
Annually
Issued

7/15/96

Maturity ( 25 yrs)

7/15/21

Current Price

$95.60

Par Value

$100

Before Tax Cost of
Debt

7.13%

After Tax Cost of
Debt

4.42%

Cost of Equity


Cost of equity is the required rate or return
by shareholders in order for the investor to
continue holding shares with the company
◦ CAPM Model
◦ Dividend Discount Model
◦ Earning Capitalization Model

CAPM MODEL


A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.



Method that uses the relationship of market risk, systematic risk and risk free rate to determine the minimum expected return on a security

Exhibit 4
Risk Free rate

5.74%

Return on the Market (geometric)

5.90%

Beta (2001)

0.69

Re = Rf+β(Rm-Rf)
Re = 5.74%...
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