Nike Cost Of Capital Case Study

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Recommended: The organisation of management of Nike

Remco de Waard
Financial Management
Case: Nike Inc.: Cost of Capital
HULT International Business School
March 2, 2014

1. Introduction
Miss Ford is a portfolio manager for Northpoint Group, a mutual-fund management firm. Kimi is considering buying shares of Nike Inc. for the NorthPoint Large-Cap Fund she is managing. A week before starting the research, Nike had presented the fiscal year 2001 results in an analysts meeting. Main purpose of this meeting was to communicate the new strategy to revitalize the company. Nike had seen her revenue stream stagnating since 1997 to a level of $9.0 billion. Within this time period, net income had been decreasing with $220 million to $580 million in 2001.

Recent reports had shown that Nike’s market share in the U.S. Athletic Shoe market had fallen from 48% in 1997 to 42% in 2000. Management stated the importance of the mid-priced shoe range in the analysts meeting and expressed their intends to develop more shoes in the price range of $70 - $90. Nike’s apparel line had proven to have growth potential under the leadership of Mindy Grossman, a industry veteran. Focusing on mid-range priced shoes and extending the apparel activities were part of a package of measurements to continue with a revenue growth target of 8-10% and an earnings-growth target of over 15%. Another part of the measurements was cutting back on expenses, by focusing on operating performance.

In order to make a proper investment decision for her mutual fund, Miss Ford made her own discounted-cash-flow forecast. This forecast proved that Nike shares were overvalued by $5.95 per share when maintaining a discount rate of 10%. A sensitivity analysis showed that stock was undervalued at discount rates less than 9.4%. To be certain...

... middle of paper ...

... in the period from half 2002 to 2008, when the crisis hit the stock exchanges. Miss Ford would have done good taking the advice to wait with buying the stock and keep a close eye on Nike, since the managerial changes on the stock prices started to make an impact in half 2002. This was a year after the writing of this case.

All calculations are represented in the Excel sheet are presented in the exhibits.

Exhibit 1. : Financial Projections
Exhibit 2. : Cost of Capital, WACC
Exhibit 3. : Cost of Capital, Dividend Discount Model
Exhibit 4. : Cost of Capital, Earning Capitalization
Exhibit 5. : Share price evaluation
Exhibit 6. : Nike Inc. Trade prices 06-01-2001 > 05-31-2011

Exhibit 1.

Exhibit 2.

Exhibit 3.

Exhibit 4.

Exhibition 5.

Exhibit 6. : Nike Inc. Trade prices 06-01-2001 > 05-31-2011
Source: http://www.marketwatch.com/investing/stock/NKE

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