...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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...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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...which originally named as Blue Ribbon Sports, is the largest manufacturer of the athletic footwear and apparel in the world, and one of the Fortune 500 companies. Figure1 shows that Nike is the leader of the global athletic footwear market, with around 31% market share in 2007. Creating by Bill Bowerman and Philip Knight in 1962, its early products are footwear, but now it has a wide range of product line. Today Nike is engaged in design, development and marketing of footwear, apparel and equipment, including shoes, sock, gloves, bags, and sports balls and so on. Many of its products are design for specific athletic such as football, basketball, running and even walking. According to figure2, Nike branded footwear contributes about 43.6% of Nike’s stock, while Nike branded apparel constitutes around 24.7%. It means that Nike branded footwear and apparel is the most important parts of its product line. Because the importance and popularity of sport, the sportswear market has a huge profit, a great prospect, and a fierce competition. Nike major competitors include Adidas, Puma, and...
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...1) Financial management deals with 2 things, managing a company’s finances and: RAISING MONEY 2) Which of the following was not identified as 1 of the 4 main financial objectives of a firm? TIMELINESS 3) The 4 main financial objectives of a firm are: PROFITABILITY, LIQUIDITY, EFFICIENCY, STABILITY 4) Match the financial objective with the correct definition: STABILITY/ THE OVERALL HEALTH OF THE FINANCIAL STRUCTURE OF THE FIRM, PARTICULARLY AS IT RELATES TO ITS DEBT-TO-EQUITY RATIO 5) … is a company’s ability to meet its short-term financial obligations LIQUIDITY 6) A company’s ability to productively utilize its assets relative to its revenue and its profits is referred to as: EFFICIENCY 7) Southwest Airlines uses its assets very productively. Its turnaround time, or the time that its airplanes sit on the ground while they are being loaded and unloaded, is the lowest in the airline industry. In terms of the primary financial objective of a firm, this attribute is a measure of Southwest’s: EFFICIENCY 8) … are projections for future periods based on forecasts and are typically completed for two to three years into the future: PROFORMA FINANCIAL STATEMENTS 9) A(n) … is a snapshot of a company’s assets, liabilities, and owner’s equity at a specific point in time BALANCE SHEET 10) Real estate, buildings, equipment and furniture are classified as … on a company’s balance sheet. FIXED ASSETS 11) Cash plus items that are readily convertible to...
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...it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation. The cost of debt was determined incorrectly. To determine the cost of debt I calculated the yield to maturity based on the information available on the Current Yield from Exhibit 4. Cost of debt is the interest rate the firm must pay on new borrowing, which can be seen in the financial markets. Since Nike has bonds outstanding, then the YTM on those bonds (7.13%) is the market-required rate on the Nike’s debt. In order to solve for the total debt, I had to find out the market value of the debt. In doing so I multiplied the book value by the percent of face value that the debt was currently selling for (.9560) or the present value of the debt. I was able to use my calculation from the CAPM as my cost of equity (10.36%). In solving for the percentage of debt I simply subtracted my percentage of equity from 100. Lastly in figuring the tax shield, I used the rate of 38%, which was obtained by adding state taxes of 3 percent to the U.S. statutory rate from Exhibit 5. 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. This is the formula I used in calculating Nike’s WACC: ...
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...well-known athletic shoe manufacturer. It would be prudent of Ford to base her assessment on Nike’s financial reports for 2001. Around the same time, Nike held an analysts’ meeting to disclose those financial results. They also addressed ways to revitalize the company, since share price was beginning to decline and revenues had plateaued at around $9 billion. Although Nike projected a rosy future, many analysts had mixed reactions to the projections. Ford was right to come up with her own forecast, seeing as the reactions ranged from too aggressive to growth opportunities. In order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital. The WACC is extremely relevant to a company’s capital budgeting team and other capital finance department members. WACC is extremely useful in determining whether or not to accept...
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...Topic: Nike Inc.: Cost of Capital Course: International Finance Table of Contents 1 Background Information on the Case: 3 1.1 Nike’s Performance: 3 1.2 Nike Analysts Meeting June 28, 2001: 3 2 Kimi Ford’s Evaluation of Nike: 3 3 Joanna Cohen’s Calculation of Nike’s Cost of Capital: 3 3.1 Assumptions & Calculations: 3 4 Our Calculation: 4 4.1 Cost of common equity 4 4.2 Cost of debt 4 4.3 Weights of Debt and Equity 4 4.4 WACC 5 4.5 Equity Value of Share 5 5 Conclusion: 6 Background Information on the Case: Kimi Ford is a portfolio manager for the mutual-fund management firm NorthPoint Group. She is considering buying some shares for a fund she is managing, the NorthPoint Large-Cap Fund which includes shares from Fortune 500 companies. On July 5, 2001 she decided to analyse the performance of Nike Inc. to determine whether to buy Nike shares for her fund. Nike’s Performance: * Share price has significantly decreased from beginning of the year * Revenues had plateaued since 1997 at around $9 billion * Net income fell from almost $800 million in 1997 to $580 million in 2000 * Market share in U.S. athletic shoes fell from 48% in 1997 to 42% in 2000 * Revenue was affected by supply-chain issues and effects of a strong dollar Nike Analysts Meeting June 28, 2001: The objectives of the meeting were as follows: 1) Disclose fiscal year 2001 results 2) Communicate a strategy for revitalizing the company ...
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...Definition of WACC The Weighted Average Cost of Capital (WACC) is the rate at which the firm is expected to pay for capital raised by issuing debt and equity to finance its assets. It is the minimum return that the company should earn to satisfy the needs of the debt holders and shareholders of the company. It is calculated by proportionally weighing each category of capital such as common stock, preferred stock, long term and short term debts, bonds etc. It is the discount rate used to calculate the present value of the future cash flows when the risk pertaining to that particular cash-generating unit is similar to that of the overall firm WACC is calculated by multiplying the cost of each category of capital raised with its proportional weight in the capital structure and summing them all. WACC CALCULATION: WACC = Cost of Equity + Cost of Debt (after tax) Weighed by the proportion of debt and equity in the capital structure Weighed by the proportion of debt and equity in the capital structure Estimating the cost of Capital 1. Capital Budgeting decisions It is important for a company to know whether a particular investment would be profitable in the long run. If the company knows the cost of capital it can accept or reject investment proposals by calculating the present values of the future cash flows. The company would most likely not invest if the cost of borrowing is greater then the returns generated from the investment. 2. Determining the ideal capital structure ...
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...I. Statement of the 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...
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...Memorandum To: DeLaune/Simonov From: Courtney Lancaster Date: October 15, 2013 Subject: History of the Auditing Profession Similar to all aspects of the accounting profession, the auditing focus in the business world has evolved considerably over its history. The main drive behind the changes has been new legislation and a strict enforcement standard which more times then not was influenced by the fraudulent activity delivered by corporate management. By the creation of oversight policies and standard setting entities, these countless scandals have shaped the accounting and auditing profession into what we know today. In 1986 the state of New York passed legislation in which the credentials regarding a Certified Public Accountant were formally acknowledged and recognized, thus creating the accounting profession itself. In 1913 the United State of America ratified the 16th amendment leading to the creation of income tax causing a spike in demand for accountants. While these changes in legislation were coming about and the profession itself was growing rapidly there was still no entity in the US that regulated the profession. In 1917 the first step to set a standard for the profession was put into action. The Federal Reserve Board and Federal Trade Commission requested that American Institute of Accountants produce a bulletin for a standardization of auditing procedures. A publication titled “Uniformed Accounting” was released shortly after as a first set of published...
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...The purpose of the prospectus is to ensure that the company gives to the public a certain amount of information about its financial position when it is first floated and whenever it subsequently offers its shares and debentures to the public. It must fully and fairly disclose the relevant facts so the risk of investment can be assessed (Vanessa, 2011). Prospectus is a way to give the public a clear understanding of newly listed companies, the investing public should take time to read before investment. The providing of prospectus can also reduce the risk of fraud of companies as they need to disclose their companies’ information fully and fairly. From the Companies Ordinance, prospectus means any prospectus, notice, circular, brochure, advertisement, or other document which offering any shares or debentures of a company to the public for subscription or purchases, or calculated to invite offers by the public to subscribe or purchase shares or debentures. If the shares or debenture are offered to any section of the public, whether selected as members or debenture holders or as clients of the person making the offer or invitation, or in any other manner, it is to be regarded as an offer or invitation to the public(s 48A(1)). Thus, whether the document technically constitutes an offer or invitation to the public, it will fall within the prospectus provisions. The provision relating to prospectuses apply as the shares or debentures had been offered to the public by the...
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...This Module is a Masters level module in Financial Management and Control. It introduces students to the interaction of accounting and finance with management in the strategic ‘where are we now, where do we want to be, how do we get there, and where are we now’ learning loop. This module concentrates on answering four key questions: • Where do companies get their sources of financial information for performance evaluation, • How do they evaluate financial performance, plan business strategies and make financial decisions • What they should do in order to effectively control and manage the financial resource, • How do they report the results and performance to all interested parties. It ought to go without saying that Masters level work will involve a significant amount of work on your part. Simply attending class sessions will not get you through this module. There needs to be a lot of student interaction with the material and a process of development through the module. My advice is to attend all the class sessions (experience shows that those who do not severely disadvantage themselves – i.e. FAIL) and to make use of the teaching staff as much as possible, but also to see ‘class’ as a way of bringing things together; a time or focus. The vast majority of the workload for this module must be outside of class contact time. You ought to be reading widely to get to grips with the methodology and techniques of the subject. You will find a mix of numerical...
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...BTEC Level 3 Diploma in Business [pic] |UNIT |Unit 2: Business Resources | |UNIT CREDIT |10 Credits | |ASSIGNMENT |Assignment 1- The Role of Financial Resources – Costs & Budgets | |TUTOR NAME | | |STUDENT NAME | | |DATE ISSUED |Please refer to your scheme of work. Dates are recorded when handed out (as assignment is issued at different times | | |for different programmes). | |DEADLINE |Please refer to your scheme of work. Dates are recorded when assignment needs to be submitted (as assignment are to be| | |handed in at different times for different programmes). ...
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...MARGET JOBE 45230251 UNIT 2 P4 BUSINESS RESOURCES Asif & Sons Ltd EXTERNAL SOURCES OF FINANCE External sources of finance are found outside the business, eg from creditors or banks .External sources of finance can be short term, where it has to be paid within a year or long term where it has to be paid over a period of years. External Sources of finance for Asif & Sons will include: BANK LOAN/ OVERDRAFT ADDITIONAL PARTNERS SHARE ISSUE LEASING HIRE PURCHASE MORTGAGE TRADE CREDIT GOVERNMENT GRANTS Bank loan is funding that is obtained from a bank for short term or long term purposes. An overdraft facility is where a bank allows a firm to take out more money than it has in its bank account. For sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital. Share issue is the stock that the company sells publicly, in order to generate capital and it can also be the stock given to insiders as part of their compensation package. The amount of shares issued can be all or part of the total amount of authorised shares of the corporation. Hire purchase, is where monthly payments are made for use of equipment such as a car. Hired equipment is owned by the buyer after the final payment Leasing, is when monthly payments are made for use of equipment such as property. Leased equipment is rented and not owned by the buyer. A mortgage is a special type of loan for buying property, where monthly payments...
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...1) The iridium project was designed to create a worldwide wireless handheld mobile phone system with the ability to communicate anywhere in the world at any time. Iridium’s innovation was to use a large constellation of low-orbiting satellites and this could make the phones much smaller and the voice delay imperceptible.Dr.Leopard made a design in which the entire system would be inverted and only one gateway earth station would be required to connect mobile to landline calls to existing land bases telephone system. The general manager of the company believed in this project and viewed it as a potential symbol of technological prowess. The challenge also provided motivation for the engineers .In order to minimize exposure to financial risk, Iridium started as a project financed company. The 12 regional gateways made Iridium a global project and it made it easy to get regulatory approval to operate in 170 countries. Gateway owners were granted seats on the board of directors. Meetings were conducted between these 28 board members. Iridium also exposed Motorola in developing satellite technology that would provide significant expertise in building satellite communication systems and vast intellectual property. The design of Iridium network allows voice and data to be routed virtually anywhere in the world. They had excess satellites in the orbits which are ready to replace any unserviceable satellites. It ensured that every region of the globe is covered. Ground network is comprised...
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