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Nike Inc

In: Business and Management

Submitted By sumanbal
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Nike, Inc.: Cost of Capital

Nike, Inc.:

Case Background:
  

NorthPoint Large Cap Fund weighing whether to buy Nike’s stock. Nike has experienced sales growth decline, declines in profits and market share. Nike has reveal that it would increase exposure in mid-price footwear and apparel lines. It also commits to cut down expenses. The market responded mixed signals to Nike’s changes. Kimi Ford has done a cash flow estimation, and ask her assistant, Joanna Cohen to estimate cost of capital.

What is WACC? and why is it important to estimate a firm’s cost of capital?

The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost. Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC.

What is WACC? and why is it important to estimate a firm’s cost of capital?

The WACC is set by the investors (or markets), not by managers. Therefore, we cannot observe the true WACC, we can only estimate it.

Do you agree with Joanna Cohen’s WACC estimations? Why or why not?

Issues  Single cost or Multiple Cost?  Cost of debt  Cost of equity  Weights of capital components

Single cost or Multiple Cost?
 

Should Cohen estimate different cost of capital for footwear and apparel divisions? I agree with the use of the single cost instead of multiple costs of capital. The reason of estimating WACC is to value the cash flows for the entire firm, that is provided by Kimi Ford. Plus, the business segments of Nike basically have about the same risk; thus, a single cost is sufficient for this analysis.

Cost of debt

The WACC is used for discounting cash flows in the future, thus all...

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