Nike Case Study Discussion

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Joanna discussion essay Kimi Ford, a portfolio manager at NorthPoint Group, was considering buying shares of Nike Inc. for the fund she managed. She read through many analyst write-ups on Nike, including all the analyst reports that she could find about the recent meeting Nike had held to disclose its fiscal year 2001 results. The reports showed that while some analysts thought Nike's financial targets were too aggressive, others saw significant growth opportunities in apparel and in Nike's international businesses. Kimi therefore decided to develop her own forecast to come to a clearer conclusion. Her forecast showed that for a discount rate of 12%, Nike was overvalued at its current share price. However, a quick sensitivity analysis she also did revealed that Nike was undervalued at discount rates below 11.2%. Since Kimi had to attend a meeting, she requested her new assistant Joanna Cohen to estimate Nike's cost of capital. To start with, Joanna collected all the data she thought she might need for her analysis. The reports she used included Nike's Consolidated Income Statements for the years 1995-2001, its Consolidated Balance Sheets for the years 2000 and 2001, the current Capital market and Financial Information provided by Bloomberg Financial Services, and her manager Kimi's Discounted Cash Flow and Sensitivity Analysis report showing growth assumptions for the next 10 years. By the end of the day, she submitted her cost of capital estimate and a memo explaining her assumptions to Kimi. The following paragraphs discuss Joanna's report, giving an analysis of her assumptions and her choice of data and method in calculating an estimate of Nike's cost of capital. 1. Selection of Single Cost of Capital Considering that Nike has multiple business segments, it would seem appropriate to estimate costs of capital for each segment individually. However, 92% of

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