Case 4 : Nike, Inc. Cost of Capital. Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya Wicaksono, ST Andi Onggo Widjono - Arifin Joyodiguno.

Case 4 : Nike, Inc.Cost of Capital

Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya

Wicaksono, ST

Andi Onggo Widjono - Arifin Joyodiguno - Johanes Tono

Prihartono

M. Saefurahman - Surya Adinata Purba

Case 4 : Nike, Inc. : Cost of Capital

EXECUTIVE B – 26B : GROUP III

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AGENDA

CASE SUMMARY

PROBLEM IDENTIFICATION

ALTERNATIVE SOLUTIONS

RECOMMENDATION

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A mutual-fund management firm

It invests money mostly in Fortune 500 companies

Its top holdings include Exxon mobile, General Motors, McDonald, 3M and other large-cap

The stock market declined over the last 18 months

NorthPoint large-cap Fund performed extremely well

In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1%

At the end of June 2001, the fund’s year-to-date returns stood at 6.4% versus -7.3% for S&P 500

CASE SUMMARY

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The athletic-shoe manufacture

Since 1997, its revenues had plateaued at around $9 billion

Net income had fallen from almost $800 million to $580 million

Market share in U.S athletic shoes had fallen from 48%, in 1997, to 42% in 2000

Adverse effect of a strong dollar had negatively affected revenue

CASE SUMMARY

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The management in concerned about the top-line growth and operating performance

To boost revenue, the company would develop more athletic-shoe products in the mid-priced segment- a segment that Nike had overlooked in the recent years

The company has also planned to push its apparel line

The company has planned to exert more effort on expense control

Long term revenue growth target is 8-10%

Earning growth target is 15%

CASE SUMMARY

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PROBLEM IDENTIFICATION

Kimi Ford is a portfolio manager for NorthPoint Large-Cap Fund

Ford is concerned whether or not, It’s worth investing in Nike

Analysts provided confronting evidence ;

Lehman Brothers recommended to invest

UBS Warburg / CSFB recommended not to invest

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PROBLEM IDENTIFICATION

If Nike’s discount rate is 12%, it’s

stock price is overvalued

If discount rate is < 11.17%, it’s stock

price is undervalued

Ford needs to calculate the cost of

capital to determine whether the

investment in Nike should be made

or ignored

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ALTERNATIVE SOLUTIONS

Cohen calculated a weighted average cost

of capital (WACC) of 8.4 percent by using

the capital asset pricing model (CAPM), but

we do not agree with Cohen’s figure and

the reason to that are as follows :

Value of Equity : 11503.2

Value of Debt : 1296.6

Weighting : Wd = 10.13%

We = 89,87%9

ALTERNATIVE SOLUTIONSCost of Debt and Equity

Risk Free rate : 10 year yield on US

Treasuries 5.39%

Market risk premium : Geometric mean 5.9%

Beta (Average) : 0.8

Cost of Debt : 7.17%

Cost of Equity : Rrf = 10,11 %

WACC = wdrd(1 – T) + wpsrps + wsrs = 9.5%10

RECOMMENDATION

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RECOMMENDATIONAs per the calculations done and the

table given the stock price at WACC = 9.5% or we can say close to BUY so the stock price should be $ 55.68, which is higher than current stock price $ 42.09

These calculation clearly shows that the current stock of Nike undervalued and is discounted rate of 11.17

The recommendation is to invest in the Nike, as the stock is undervalued for the calculated cost of capital, WACC = 9.5%

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