Nike: Cost Of Capital Case Study

1820 words - 8 pages

Nike inc:cost of capital

INTRODUCTION
Background:

Kimi Ford, a portfolio manager of a large mutual fund management firm, is looking into the viability of investing in the stocks of Nike for the fund that she manages. Ford should base her decision on data on the company which were disclosed in the 2001 fiscal reports. While Nike management addressed several issues that are causing the decrease in market sales and prices of stocks, management presented its plans to improve and perform better. Generally, the case issue is to examine if the share price of Nike is undervalue or overvalue for guide investors to buy or not and the common ...view middle of the document...

The reason of estimating WACC is to value the cash flows for the entire firm that is provided by Kimi Ford. Plus, the business segments of Nike basically have about the same risk; thus, a single cost is sufficient for this analysis.

The weighted average cost of capital (WACC), Nike INC:

Cohen calculated a weighted average cost of capital (WACC) of 8.4 percent by using the Capital Asset Pricing Model (CAPM) for Nike Inc. We do not agree with Joanna Cohen because of below mentioned:

Value of equity
The problem with Cohen’s calculations is that she used the book value for both debt and equity. While the book value of debt is accepted as an estimate of market value, book value of equity should not be used when calculating cost of capital. The market value of equity is found by multiplying the stock price of Nike Inc. by the number of shares outstanding.
Market Value of Equity (E) Calculation:

E = Stock Price x Number of Shares Outstanding

= $42.09 X 271.5

= $11,427.44

This figure is should be used for market value of equity (E) rather than Joanna Cohen figure ($3,494.50).

Exhibit 3
Nike, Inc.: Cost of Capital
Consolidated Balance Sheets
May 31,
As of
(In millions)
Assets
Current Assets:
Cash and equivalents
Accounts receivable
Inventories
Deferred income taxes
Prepaid expenses
Total current assets
Property, plant and equipment, net
Identifiable intangible assets and goodwill, net
Deferred income taxes and other assets
Total assets
Liabilities and shareholders' equity
Current Liabilities:
Current portion of long-term debt
Notes payable
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes and other liabilities
Redeemable preferred stock
Shareholders' equity:
Common stock, par
Capital in excess of stated value
Unearned stock compensation
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
2000
2001
$
254.3
1,569.4
1,446.0
111.5
215.2
3,596.4
$
304.0
1,621.4
1,424.1
113.3
162.5
3,625.3
1,583.4
410.9
266.2
$ 5,856.9
1,618.8
397.3
178.2
$ 5,819.6
$
50.1
924.2
543.8
621.9
-
2,140.0
470.3
110.3
0.3
$
5.4
855.3
432.0
472.1
21.9
1,786.7
435.9
102.2
0.3
2.8
369.0
(11.7)
(111.1)
2,887.0
3,136.0
$ 5,856.9
2.8
459.4
(9.9)
(152.1)
3,194.3
3,494.5
$ 5,819.6

In calculating value of debt,

Value of Debt
To calculate total value of debt:
Market Value of Debt (D) Calculation:

D = Current LT + Notes Payable + LT Debt 

= $5.40 + $855.30 + $435.9

...

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