Nike Inc.

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Nike Inc.

Kimi Ford, a portfolio manager at Northpoint Group, a mutual fund management firm is looking into investing in the stocks of Nike Inc. for the company that she’s in charge of. Her decisional criteria should be based on Nike’s financial reports and statements of 2001. There were several problems in Nike because of which the stock prices of the company were declining and also a third party gave their opinion based on if the investment is really worth it.

The weighted average cost of capital (WACC) is a percentage of income that a company is liable to pay as a cost of debt and equity of fund the assets of the company usually annually. This means that the company must earn at least that much money every year to be able to pay for the usage of their assets and have disposable income in addition to that as profit. WACC is calculated by multiplying the relative weights of each component of the capital structure – the cost of debt and equity. This then shows the company if the investment in the assets is really worth it.

The consideration of the cost of capital is important for the management of a company to take its financial decisions. The concept is quite relevant for the following reasons:
1. Capital budgeting decisions
2. Designing the corporate financial structure
3. Deciding about the method of financing
4. Performance of top management

Calculation of WACC

WACC = (cost of equity + cost of debt)

This is weighted by proportion of debt and equity in the capital structure.

Cost of Capital calculation for Nike Inc.

As we read and found out that there were a lot of miscalculations in the case done by Cohen. For example, the WACC is 8.4% according to Cohen using the CAPM model. Following are the verifications of the cal...

... middle of paper ...

... find the discount rate of 9.8767%. Through the new discount we calculated the new share price of $56.81. The initial share price was $63.50, which was undervalued by $21.41 per share but because of the revised discount rate we find that the share price is undervalued by $14.72 per share.

The management of Nike Inc. has goals for the near future that can provide an uprising profit for the company. All of the objectives set by the company seem to have the company make abnormal profits along with the recovery of the company from its current state. Secondly, the stock of the company is undervalued as per our analysis. Therefore I finally recommend that Nike Inc. should be added in the larger limit profile of NorthPoint and should be invested in because the company current has a great growth potential at least in the coming months that would be profitable for the fund.

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