Nike Cost of Capital - 711 Words

NIKE, INC. COST OF CAPITAL Context: Estimating Cost of Equity with different methods. Compute WACC Nike’s current price per share= $ 42.09 Question: Is it undervalued or overvalued to make buy /sell decision? Forecasts for Cash flows, Dividend growth, EPS estimates for NIKE are given. Interest rate #’s, Betas, Book values on debt and equity are given. Also historical performance #s are given. At 12% WACC Nike is overvalued and hence sell decision; At 11.17% correct valuation; WACC below 11.17% , undervaluation and hence buy decision. Exhibit 2 : The bottom table shows the sensitivity of share price to discount rate. The issue is which discount rate (WACC) to use to make the decision. Lower the discount rate, higher the†¦show more content†¦Tax Rate = 38% Hence After Tax Cost of Debt= 4.45% Methods for estimating Cost of Equity: (a) Dividend Discount Model (DDM) K= (D in year1/ Current P) + g g= 5.5% according to Moody’s; [What is the actual during 1997-2000. Very Low] Current Dividend = 0.48 P= $42.09 g= 5.5% K= 12.03% Assumptions of DDM--- Stable growth in revenues, and Dividend; Has Nike experienced stable growth? (b) Earnings Multiplier: Estimate next year’s earnings (Forecast of EPS) divided by price per share. Following this procedure K= 6.6% [ Forecast of EPS= (755.4/271.5); Price per share= 42.09 from Exhibit 2] This method does not consider the growth rate . If you follow Consensus Forecast ( Exhibit 4), K= 5.5%-- 6.34% This method ignores rate of growth in the future. If you add growth rate of revenue projected by the case writer g= 6.5%- 6% K= 13.1% ---12.6%. If you follow Moody’s g, then K= 12.1% The range is 12-13% with growth rate added.  © Yield plus Method for estimating K Cost of Debt for Nike= 7.17% on 25-yr. note. Add premium for equity of Nike. 5% Approx. Hence K = 12+% approx. (d) CAPM method. Risk-free rate= 5.74% Beta= 0.80 MRP= 5.90% K for Nike= 10.46%Show MoreRelatednike cost of capital1980 Words   |  8 PagesUV0010 NIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts’ write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike’s share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobilRead MoreNike Cost Of Capital1791 Words   |  8 PagesGraduate School of Business Administration University Version 2.0 of Virginia UVA-F-1353 Version 2.0 Nike, Inc.: Cost of Capital On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analyst write-ups of Nike, Inc., the athletic shoe manufacturer. 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But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) because her assumptions such as Revenue Growth Rate, COGS / Sales,  S A / Sales, Current Assets / Sales, and Current LiabilityRead MoreCase 14 Nike: Cost of Capital Essay1143 Words   |  5 PagesNike, Inc.: Cost of Capital Case 14 A Case Brief Submitted to Submitted by In Partial Fulfillment of the Requirements for Date Submitted September 28, 2011 Summary This case highlights Kimi Ford, a portfolio manager with NorthPoint Group, a mutual-fund management firm. She managed the NorthPoint Large-Cap Fund, and in July of 2001, was looking at the possibility of taking a position in Nike for her fund. Nike stock had declined significantly over the previous year, and it appearedRead MoreNike Inc Cost of Capital Case Study917 Words   |  4 PagesNike Inc. Case Number 2 Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to twoRead MoreCase Analysis of Nike, Inc.: Cost of Capital731 Words   |  3 PagesApparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) too. Because her assumptions such as Revenue Growth Rate, COGS / Sales, S A / Sales, Current Assets / Sales, and Current Liability / Sales have been adopted from previous income