Nike Inc Cost of Capital Case Study

Nike Inc Cost of Capital Case

Overview:

        In this case Kimi Ford whom works for a mutual fund management firm has been tasked with evaluating the current position of Nike Stock for her company. Nike has experienced losses in the latest year of observance, however during a recent meeting Nike has laid out a bold new strategy to revitalize the state of the company by expanding its economy priced footwear and clothing lines, as well as greatly reducing its operating expenses. Based upon Kimi’s analysis, she will recommend either a buy or pass option for the North Point Group that they will use to determine adding Nike stock to their portfolio. Kimi requested that her analyst Joanna Cohen perform a cost of capital analysis to assist her in her decision making. The results of Joana’s analysis determined that Nike was overvalued at a discount rate of 12% or above, and alternately Nike was a strong candidate for purchase at a discount rate of 11.17 or below. Joanna’s calculations position Nike as a positive purchase for North Point Group, however we are tasked with reviewing Joanna’s work for inaccuracies or assumptions that may have created an inaccurate representation of Nike’s current evaluation.

Single or Multiple Costs of Capital:  

        Based on my understanding of determining single versus multiple costs of capital I agree with Joana’s decision to evaluate the company using a single cost of capital evaluation. Nike’s portfolio spans several categories of products such as sportswear, shoes, and apparel that is offered internationally, all of which contribute to sales. However, after reviewing the case data it appears that all the product lines share roughly the same amount of risk. I would not recommend any changes concerning this decision.

Joanna’s WACC Analysis of Nike:

        Joanna’s calculations yielded a cost of capital of 8.4% however there are a couple areas of her evaluation that could be subject to question, thus throwing off her final WACC and ultimately could affect the final recommendation of buy or pass. First, the entire evaluation is based on using historical data. Obviously with an estimation which extends out ten years to the year 2011 uses past tax rates and cash flows for its evaluation. Obviously, there is no way to assure that future performance will resemble past performance. As we discussed in our last class period, anything beyond a year or two out it subject to heavy speculation. In my opinion, Joanna’s figures do not represent conservative enough numbers to account for the speculative nature of a 10-year assessment. Additionally, it appears that Joanna is using the book value of Nike for her evaluation. Upon preparing for this case, I reviewed the class readings as well as some additional internet research and understand now that it is more appropriate to utilize market value of the debt and equity. This means there could be some fluctuation in the final cost of debt given that Nike is using both debt and equity financing.