Nike Cost of Capital Essay

Kimi Ford a portfolio manager at NorthPoint conclave which is a mutual-fund management firm, is considering to buy some divvy ups from Nike, inc even if its contend price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in issue 500 companies and it was doing well despite the decline in the stock commercialize over the last 18 months. Kimi therefore surveyed the results of Nikes fiscal-year 2001which had been revealed a week earlier.Issues that caused a decline in market sales as revealed by the management of Nike 1. Revenues since 1997 had stopped growing but remained around $9. 0 billion. 2. The elucidate income had fallen from $800m to $580m a decline of $220 million. 3. Nikes market share in the U. S. athletic shoe industry had fallen from 48 percent in 1997 to 42 percent in 2000 (6% decline) 4. The issue of Supply-chain and strong dollar central rate also affected the revenue negatively. Nikes Strategic c omputer programme to address the above issues1. Increase revenues by developing more athletic-shoe products in the mid-priced range. 2. Push its apparel line which had performed tremendously well. 3. Exert more get d have got control on the speak to side. 4. Nikes executives expressed their interest to impact with the long-term revenue growth target of 8 to 10 percent and earnings-growth targets of above 15 percent. Although the management presented its plan to improve on its performance, there were mixed reactions from the third party analysts.Kimi Ford was also not satisfy with the Nikes analysis therefore she decided that it was necessary to develop her own discounted-cash-flow forecast. She found that Nike was overvalued at the discounted rate of 12% at its current share price of $42. 09. She also did a quick sensitivity analysis which revealed that Nike was undervalued at discounted rates below 11. 17%. In order for Kimi to make a proper investment decision for her Fund, sh e asked Joanna Cohen to appear the cost of capital. However there were some problems. Cohens calculation of cost of capital.She used single cost of capital for the apparel and footwear lines assuming that they are sold done the same marketing and distribution channels and are often marketed in other collections of similar designs. WACC (Weighted Average Cost of Capital) WACC is calculated using burden averages of debt (Kd) and equity (We) Cohen used Capital Asset Pricing Model (CAPM) to calculate WACC 0f 8. 4 % however, she used the book values yet weights should be base on the market value. Her result of $3,494. 5 for the Equity was wrong. The formula for astute the Market value of equity is E = stock Price x Number of shares outstanding .