...problem Nike has new investment endeavors revamp its recent drops in net income and market share. Wall Street analyst reactions to the endeavors are mixed, with some recommending Nike as a “Strong Buy” and others recommending a “Hold.” In case 13, Nike Inc.: Cost of Capital, I am acting as a portfolio manager to estimate Nike’s cost of capital to determine whether the stock is overvalued or undervalued. II. Alternative Solutions • Dividend Growth Model (DGM) see appendix for calculations • Capital Asset Pricing Model (CAPM) see appendix for calculations • Weighted Average Cost of Capital (WACC) see appendix for calculations III. Analysis of the Alternatives • Dividend Growth Model (DGM) The Dividend growth model is a simple and easy to understand model used to estimate a company’s cost of capital. The method works because RE the return that the stockholders require to the stock, so it can be interpreted as the firms cost of equity capital. In able to use this method I used Value Line’s Forecast of Dividend Growth from ’98-00 to ’04-’06 of 5.50% for Nike as my growth (g) ( see Exhibit 4). I was able to forgo the calculation of D1 because Nike had paid a constant dividend of .48 for the past 3 years (Exhibit 5). Although the method is simple in its approach, DGM does not account explicitly for risk. There is no adjustment for the riskiness of the investment. • Capital Asset Pricing Model (CAPM) The CAPM is widely used to determine a company’s cost of equity...
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...Calculation of cost of debt by using IRR method : Formula : B0=I*t=1n11+rd t +M*11+2dn=I*PVIFA r d,n+M*PVIFrd,n B0=Value of the bond at time zero I= annual interest paid in dollars n=number of years to maturity m=par value in dollars rd=required return on bond B0=$956 Coupon Rate =13.5% I= coupon payment=13.5%*1000 = 135 Year to maturity =n=25 years Par value =1000 A trial –and – error technique: At the first consider rd=7.58%equal to method one and B0=$956 I= coupon payment=$135 1)The first try: 956=135*t=1251(1+7.58%)t +1000*(1(1+7.58%)25) 956= 135*(PVIFArd,n) +1000*(PVIFArd,n) From table A-4 and A -2 (Appendix A) r=7.58%, n=25 PVIFArd,n=11.164 1000*(1(1+7.58%)25)=1000*0.161=161 135*11.164=1507.1 956≠1507.1+22.3 2)Another try rd=0.10 956=135*t=1251(1+10%)t +1000*(1(1+10%)25) PVIFArd,,n=9.077 135*9.077=1225.4 1000(1(1+10%)25)=0.092 PVIFrd,n=0.092 ,1000*0.092=92 956 ≠ 1225.4 +92 3)An other try: rd:=12% PVIFArdn=7.843 PVIFrdn=0.059 135×7.843=1058.9 1000×0.059=59 956≠1058.9+59 4) An other try: rd=%14 PVIFArdn=6.873 PVIFrdn=0.038 135×6.873=927.9 1000×0.038=38 927.9+38=965.9 956≠965.9 5)An other try: rd=%14.2 PVIFArdn=6.791 PVIFrdn=0.036 135×6.791=916.8 1000×0.036=36 916.8+36=952.6 956≠952.8 6)An other try: rd=%14.15 PVIFArdn=6.810 PVIFrdn=0.037 135×6.81=919.3 1000×0.037=37 919.3+37 = 956.3 959=956.3 rd=%14.15= cost of debt=correct...
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...1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? Answer: The cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company's equity shares will not drop. This is a consonance with the overall firm's objective of wealth maximization. WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC of a firm is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and will create positive net present value for stock owners. Thus, since the WACC is the minimum rate of return required by capital providers, the managers in the company should invest in the projects which generate returns in excess of WACC. We do not agree with Joanna Cohen’s calculation regarding the WACC from 3 aspects: 1) When Joanna Cohen...
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...is it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their respective quantitative contributions to the entire amount of funding, serving hence as an allocation base, into account. As there is a direct relationship between the two portions, debt and equity, in order to calculate a proper overall price, they must be multiplied with their respective single prices. What is crucial in the calculation process is that one must not omit the tax shield effect caused by debt. Which is, due to fiscal regulations, that all interest expenses which occur in the financing process are tax deductible and, hence, reduce the overall result. This circumstance is mathematically reflected by inserting the term (1-tc). Tc here stands for the corporate tax rate, which, as in the NIKE case, needs adjustment for any taxes imposed by particular states. So if a company faces 38% corporate tax rate the remaining part of 62% count as an expense. Again, as there is a direct relationship to the proportion of the debt and its cost, the higher the tax rate the higher the...
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...JOHN MOLSON SCHOOL OF BUSINESS | CASE ANALYSIS: NIKE INC. – COST OF CAPITAL | FOR PROF. EDWARD WONG | | ARUN KUMAR DURAIRAJ – 27416008 NIDISH PC – 27254423 VIPUL PARTI – 27246307 | 12/3/2015 | | Evaluation of Cohen’s Report and Calculation of WACC We do not agree with Cohen’s report about the cost of capital because of the following reasons. * Capital Structure (% equity vs % debt): In calculating the capital structure of Nike Inc., Johanna Cohen has calculated the percentage of equity from the book value given in the balance sheet. However this is not a correct index of the current market value of the firm. Instead, she should use the most recent value given by the recent market price of the share. Market Value of Equity = Current outstanding shares*Current share price = 271.5 million * 42.09 = 11427.44 million Debt: Current Portion of LT Debt = $5.4 million Notes Payable = $855.3 million Long Term Debt = $435.9 million Total Debt = $1296.6 million Proportion of Debt = 1296.6/(1296.6+11427.44)...
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...NIKE INC. Cost of capital estimation | GROUP FINN- 400 | NIKE INC. Cost of capital estimation | GROUP FINN- 400 | Background: The case is built around the stock buy decision of Nike Incorporation by the North-Point Large Cap fund. The mutual fund manager, Kimi Ford is evaluating Nike’s financial performance. Nike’s revenues had stabilized at $9 Billion since 1997 and Net Income had fallen from $800 Million to about $580 Million. In sum, Nike was experiencing a decline in sales growth, profits as well as its market share in US. In a meeting in 2001, the management sought to increase its market exposure in the mid-priced footwear and apparel lines to revitalize growth and to cut down expenses to increase profits. These measures were expected to yield higher growth in revenues and consequently income of Nike Inc. The Issue: “The issue is the Buy or Not Buy decision of Nike Stock by the mutual fund manager.” The Issues requires the analysis of Market price per share of Nike Inc. and to value it according to the estimates of future growth. Analysts provide contradictory evidence on Buy Vs Sell of Nike Inc. Shares as well: Lehman Brothers: Buy UBS Warbug & CSFB: Not Buy The Decision Criteria: The decision to buy the stock of Nike is based upon the valuation of its share price. The current share price of Nike Inc. may be overpriced or underpriced. If it’s underpriced, the decision would be to buy the stock and if...
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...Nike Inc. Case Summary. Kimi Ford, a portfolio manager of NorthPoint Large Cap fund is considering purchasing Nike’s stock. Nike’s report revealed a decline in sales growth, profits and market share. However, Nike had a strategy to revitalize the company. The strategy would address both top-line and operating performances by pushing its apparel lines and cutting down expenses. Analyst responded with mix signal to Nike new plan. Ford has done the discounted cash flow forecast, and Joanna Cohen estimated the cost of capital. What is Weighted Average Cost of Capital and its Importance? The weighted average cost of capital (WACC) is the rate that a company is expected to pay to debt holders and shareholders to finance its assets. It is the minimum return that a company must earn on existing assets base to satisfy its owners, creditors, and other benefactors of the firm. There are numbers of ways a firm can raise funds: common and preferred equity, governmental subsidies, warrants, debts, and so on. Each of this securities are expected to produce different returns. WACC is calculated using relative weight of each component of the capital structure (debt and equity). The WACC is set by the investors, not by managers. However, WACC is significantly important to managers to making financial decision, measure economic profit, appraisals, performance and incentives Cost of Capital Calculations. We did not agree with Cohen calculated weighted average cost of capital (WACC) of 8.4...
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...Case Analysis of Nike, Inc.: Cost of Capital (CON) Cost of Equity The cost of equity is comprised the cost of preferred stock and common stock. In this case, I am willing to focus on the cost of common stock because Nike did not pay any dividend after June 30, 2001(see Exhibit 4). The cost of common stock is the return needed on the stock by shareholders in which investors discount the expected dividends of the firm to ascertain its share price. To perceive this definition, let me bring you an example: Assume you want to invest on the stock of Nike, Inc. Your expected return is 12% for one year. The current share price is $42. Your benefit of the investment to purchase one share will be $5.04. If the company pay the dividend of $2.04 per share annually, the share value should increase to $45 in the next year to secure your benefit ($5.04). Therefore, the cost of equity is to cope with the risk of share price’s changes and the dividends paid by the company. There are two techniques to obtain the cost of equity as follows: 1) Capital Asset Pricing Model (CAPM) As you know, the Capital Asset Pricing Model (CAMP) establishes a rational relationship between Non-Diversifiable risk and return of all assets due to all companies can eliminate or decrease Diversifiable risk by playing on the type and return of assets. Here is the formula of CAPM: Rs = Rf + [ b * (Rm – Rf)] Where: Rs: Cost of equity Rf: Risk – free rate of return (commonly measured by the return...
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...NIKE, INC.: COST OF CAPITAL Book value vs. Market value While calculating the Nike’s cost of capital using both the book value (Exhibit 1.1) and the market value (Exhibit 1.2), I could notice the mistake Cohen made finding the equity value. Cohen used the book value to reflect equity value. Although the book value is an accepted measure to estimate the debt value, the equity’s book value is an inaccurate measure of the value perceived by the shareholders. Since Nike is a publicly traded company, market value is the better method in reflecting Nike’s equity value. Cohen’s book value of equity is the total shareholder’s equity in the balance sheet, $3494.5. The market value of equity on the other hand, is $11427; computed using stock price X number of shares outstanding ($42.09*271.5 million shares), which is also commonly exercised computing market capitalization of a company in an industry. The book value of equity used by Cohen is very different from the market value of equity. Therefore the weight of debt and equity also differ greatly. Cohen found that Nike is financed by 27% on debt and 73% on equity, but using the market value to better reflect Nike’s debt and equity, I found that Nike is financed by 10.19% on debt and 89.81% on equity. The differences are bigger than it looks, as we are talking about millions of dollars being calculated inaccurately, so it is important for portfolio managers like Kimi Ford to carefully assess the assumptions that are needed to calculate...
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...UV0010 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 ExxonMobil, General Motors, McDonald’s, 3M, and other large-cap, generally old-economy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had 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 the S&P 500. Only a week earlier, on June 28, 2001, Nike had held an analysts’ meeting to disclose its fiscal-year 2001 results.1 The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues had plateaued at around $9 billion, while net income had fallen from almost $800 million to $580 million (see Exhibit 1). Nike’s market share in U.S. athletic shoes had fallen from 48%, in 1997, to 42% in 2000.2 In addition, recent supply-chain issues and the adverse effect of a strong dollar had negatively affected revenue. At the meeting...
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...Executive summary In this report we focus on Nike's Inc. Cost of Capital and its financialimportance for the company and future investors. The management of NikeInc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it isimportant to estimate precisely the weighted average cost of capital (WACC). In our analysis, we examine why WACC is important in decision making andwe show how WACC for Nike Inc. is calculated correctly. Also, we calculatethe company's cost of equity using three different models: the Capital AssetPricing Model (CAPM), the Dividend Discount Model (DDM) and the EarningsCapitalization Model (EPS/ Price), we analyze their advantages anddisadvantages and finally we conclude whether or not an investment in Nikeis recommended. Our analysis suggests that Nike Inc.'s common stock should be added to theNorth Point Group's Mutual Fund Portfolio. I. The Weighted Average Cost of Capital and its Importance for Nike Inc. The Weighted Average Cost of Capital (WACC) is the average of the costs of a company's sources of financing-debt and equity, each of which is weightedby its respective use in the given situation. By taking a weighted average,we can see how much interest the company has to pay for every marginaldollar it finances. A firm's WACC is the overall required return on the firm asa whole and, as such, it is often used internally by company directors todetermine the economic...
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...Citations…………………………………………………………………………………………13 PART I: DESCRIBE TWO PUBLICLY TRADED BUSINESS RIVALS 1. What two publicly traded business rivals is this paper about? Give their Corporate addresses. Describe the businesses in which they compete against each other. What industry are these businesses competing in? Nike Inc. and Adidas AG are the two largest and arguably well known sportswear companies in the world. Both companies compete against one another in the numerous industries including the athletic footwear industry. Nike Inc. is in itself the world’s largest athletic footwear supplier, holding an astonishing 50% of a 20 billion dollar global industry (S&P, 2010) and 40% of the US market (IBIS, 2010). Nike powers its massive lead on the market with innovative technology and product creation often bringing all new ideas and offerings to the market before any other. Nike Inc. describes their principle business activity as “the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products” Nike earned 2009 revenues of $19,014,000,000, netting $1,906,700,000 in profits (Nike 10-K, 2010). Nike boasts an extremely lucrative stable of world renowned endorsers. Those endorsers include Tiger Woods, Michael...
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...Financial Statement Analysis for Nike Nike Corporation released its financial statement for the year ended May 2014. Nike Inc. is a sports apparel manufacturing firm with diverse interests all over the world. The financial statements suggest a strong company whose stocks are not undervalued, but with the potential of exploding higher having shown sustained strengths when the Europe, American, and Chinese economies were at the brink of disaster. Despite sustaining fluctuations from the weakening of the strong economies, the company continued to register an increase in revenues in the financial period 2012-2013 and 2013-2014. It also registered an increase in its net income in the same financial periods. A firm’s income statement is a financial statement presenting the firm’s financial operations over a given period. It communicates the amount of revenues that a firm generates during the time, and the cost incurred to generate the revenue. For the case of Nike, revenues were realized during the last financial period from insurance premiums, goods sold and services rendered among other activities. In cases involving financial institutions interest and investment income, trading gains and sales were also included. Nikes revenues rose in the financial period 2013/2014. Its operating income, income before taxes, income from continuing operations increased. Consequently, its net income for the year 2013/2014 increased by about seven percent (Nike Inc.: Businessweek.com). A balance...
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...Nike Inc. Case 1. What is the WACC and why is it important to estimate a firm’s cost of capital? WACC is weighted average cost of capital, which is the expected rate of return on average from all the company’s existing debts and securities. It takes into account all different types of financing in the company’s capital structure. The reason it is important to estimate WACC is because it measures what it costs the firm to take on a project based on its current Debt and Equity mix. When the firm decides to take on a project it needs to discount the future cash flows of the project by the company’s WACC to determine whether or not to take the project on. High WACC generally indicates more risk since the company pays more for its capital. It is generally used by managers to decide if a new investment project is worthwhile. All developing firms require more capital to accommodate more demand. As a result, the firm needs more capital. Capital is raised through debt, preferred stock and common equity. Debt is acquired either through bonds or through borrowing from banks. The common equity form of the capital can be raised through either retaining the earnings and reinvest in the future company development or it can be raised through issuing common stock. The preferred stock is the least favorite method to raise capital. While interest payments provide the earnings for holders of debt, the cost of equity is the opportunity cost demanded by investors for making the funds available...
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... Nike is the leading manufacturer of athletic shoes, equipment and apparel. Nike is one the most heavily advertised and best known brands in the world. Nike has reach over 170 countries, subsidiaries name include: Cole Haan, Converse Inc., Hurley International LLC, Nike Golf, Umbro Ltd., to name a few. As of May 31, 2009 Nike operated 338 retail stores in the United States of America and 336 retail stores internationally. (U.S. Securities and Exchange Commission, 2009) Financial Performance Nike is definitely the leader within its sector of footwear and accessories. Nike does show vulnerability due to a decline in 2009 compared to 2008 in regard to the Net Income. In 2008, Nike showed a growth within the Net income ratio totaled to 26.28%, in 2009 Nike net income ratio equaled 21.06% showing a decline of 5.22%. The Cash Flow of Operation show a decline from the previous year as well; however, the company strength is still standing strong at 1.74 billion. Increase in the capital transpired in November 19, 2009, which reflects growth in regard to the Total Revenue and Gross Profit Margin; the...
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