This is an analysis on Nike Cost of Capital from an Investor's perspective and recommended financial decision that should be made

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Nike Inc : Cost of Capital
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2. Background
➔ Nike’s (NYSE: NKE) share price had declined significantly from the start of the
year 2001
➔ Kimi Ford, a portfolio manager at NorthPoint Group, is weighing whether to buy
Nike’s shares
➔ Nike revealed their plan to boost their revenue by developing more mid-priced
athletic shoes and pushing their apparel line. They would also give extra effort to
cut their expenses
➔ Analyst reactions were mixed. Some saw significant growth opportunities in
apparel and Nike’s international businesses, while some thought the financial
target to be too aggressive
➔ Kimi Ford has done cash-flow forecast and asked her new assistant, Joanna
Cohen, to estimate Nike’s COC
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3. Business Problem
1. Nike’s revenue had plateaued at around $9 billion, while net income had fallen from
almost $800 million to $580 million
2. Nike’s market share in US athletic shoes had fallen from 48% in 1997 to 42% in 2000.
Financial Issue :
1. Single or Multiple Cost of Capital
2. Methodology for Calculating the Cost of Capital
3. Cost of Debt
4. Cost of Equity
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4. Analysis
1. Single or Multiple Cost of Capital
✔ Single cost of capital is seen as a more proper application towards Nike as compared to
multiple cost of capital due to similar risks profiles within Nike’s business segmentation.
2. Methodology for Calculating the Cost of Capital
✔ The reason of calculating WACC is to estimate Nike’s value by applying WACC as the
discount rate in projecting the cash flow.
✔ WACC itself is the average of the costs of equity and debt, and gives each one the
appropriate weighting. By using a weighted average cost of capital, it allows the firm to
calculate the exact cost of financing any project.
3. Cost of Debt & Cost of Equity
✔ The WACC is used for discounting cash flows in the future, thus all components of cost must
reflect firm’s concurrent or future abilities in raising capital.
✔ Cohen mistakenly uses the historical data in estimating the cost of debt. She applied the
average historical balance of debt instead of applying the latest cost of debt as shown in Exhibit
4. It may not reflect Nike’s current or future cost of debt.
✔ Cohen also applied historical data in estimating beta for cost of equity calculation. This should
not occur in calculating cost of equity, in which the latest beta should be applied to reflect Nike’s
latest risk condition.
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5. Current Nike Shares in Stock Market
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6. Current Condition (Shareprice vs Equity per Share)
With claim of the company of CoC=12% :
1. Equity per share was $37.24, while share price on stock market was $42.09 - which is overvalued.
2. Joana found out with discount rate of 11.17%, value per share will be exactly at $42.09.
3. Meaning that the company is over-claiming the COC at 12%.
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7. WACC - Joana’s Assumption
By using 20 years assumption, Joana found out :
1. WACC is equal to 8.39%, resulting for $69.41 of value per share, which is actually much higher than share price
in stock market.
2. This means a green light for the company to acquire the shares, which was undervalued by 60% ($42.09/$69.41)
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8. WACC - Correction for Joana’s Calculation
Some correction for Joanna calculation, due to over-lengthy duration of 20 years :
1. Using 10 years as based of calculation, correction on ß with latest to date to 0.69.
2. The Equity per share gained is $79.28, which is still still higher than market value at $42.09/share. This
means that current share prices is undervalue by 53%.
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9. WACC - Damodaran Concept
With Damodaran concept, and 10 years bond rate as assumption:
1. Still the equity per share is much higher than market value ($64.61 out of $42.09). Market value is
undervalue by 65%.
2. Green light for the company to acquire the shares in stock market.
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10. Recommendation
➔ The financial analysis showed that Nike shares was undervalued and acquisition of
shares could make a good return of investment of North Point Group.
➔ By considering estimated WACC, Equity Per Share, potential long-term revenue
growth, and potential earnings growth, it is recommended for North Point Group to
acquire Nike shares.
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