Nike, Inc.: Cost Of Capital Case Study

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Joanna Cohen has been asked to estimate Nike’s cost of capital for her boss, Kimi Ford. Ford is a portfolio manager at a mutual-fund management firm and is struggling to determine if she should purchase Nike shares for the successful fund she manages. On week prior, Nike held an analysts meeting to communicate a strategy for revitalizing the company and increase market share. At this meeting, management revealed plans to address both top-line growth and operating performance. To increase revenue, Nike will develop more athletic-shoe products geared towards the midpriced segment, a segment Nike has overlooked in recent years. The company also plans to push its apparel line which has performed extremely well under new management. To minimize costs, Nike will focus on expense control. Kimi Ford pored through the analysts reports discussing the recent analysts meeting Nike had but walked away with no clear guidance. Some viewed Nike’s financial targets as too aggressive, while others saw significant growth opportunities. Because of this, Ford developed her own discounted cash flow forecast which showed that at a discount rate of 12%, Nike was overvalued at its current share price of $42.09. Ford also conducted a quick sensitivity analysis which revealed Nike was undervalued at discount rates below 11.17%. Due to time constraints, Ford asked her assistant, Joanna Cohen, to estimate Nike’s cost of capital and help Ford determine if Nike’s stock is under or overvalued. The following is my own analysis of Cohen’s findings and whether or not I agree with them. I. Single or Multiple Costs of Capital I agree with Cohen on her decision to compute only one cost of capital for Nike, given the company’s various business segments. With the exception of one line which makes up only a tiny fraction of total revenues, all business segments are

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