Summary of Nike Case
张朦 袁潇 钟毅 张希圆
Nike is nowadays one of the world’s largest suppliers of athletic shoes and apparel and a major manufacturer of sports equipment accessories and services. In 2001, Nike’s share price declined to $42.09 on July 5. The unexpected fall in share price captures the NorthPoint Large-Cap Fund’s attention. The fund manager of this mutual fund, Kimi Ford, concerns whether it is the time to put Nike into the portfolio. On July 5, 2001, Nike discloses its fiscal year 2001 results and declares a new operation strategy, which leads to controversy in Wall Street. This situation makes it even harder for Kimi to make the decision. She finds the key issue lying in the cost of capital. When she using a discount rate of 12 percent in early forecast, the company is definitely overvalued. And when the discount rate is below 11.2%, as the sensitivity analysis shows, the share price of $42.09 is lower than what it should be. Kimi requests her assistant Joanna Cohen to estimate Nike’s cost of capital.
Joanna’s analysis is partly right. Considering that non-Nike brands only account for 4.5 percent of revenue and all sports-related businesses face the same risk factors, she chooses to compute single cost of capital. In addition, the methodology of Weighted Average Cost of Capital (WACC) is a valid tool for estimation. However, Joanna makes some mistakes in the analysis process. First, when calculating Nike’s cost of debt, Joanna uses historical interest expense, which can not represent Nike’s future finance plan. Instead, we suggest taking the Yield to Maturity (YTM) of bonds newly issued by Nike as the cost of debt. Secondly, the estimation of beta in Capital Asset Pricing Model (CAPM) is not appropriate. The nearest beta describes Nike’s risk factor more properly than historical average. Finally, since the stock market is fairly active, the book value of equity may be inaccurate. The market value of equity, which can be obtained by multiplying the...
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