Nike Wacc Case Study - 2281 Words

Financial Management Agenda 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? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 2 Case Overview Nike, Inc. NorthPoint Group Investment Decision ï‚ § Current share price of USD 42.09 ï‚ § Declining market share for the period 1997-2000 ï‚ § Strategy for revitalizing the company under consideration ï‚ § Plan†¦show more content†¦Ã¯â€š § Joanna is right to consider debt denominated in foreign currency, however her approach is flawed since she is once again looking at outstanding debt, which arrangements that occurred some time in the past might significantly differ from the current market reality. ï‚ § Since existing Nike bonds are trading at discount, we already know that the market yield exceeds the coupon rate. 5 * Strong arguments exist for using the geometric mean under certain circumstances. This point will be further elaborated Agenda 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? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 6 Calculating Cost of Equity ï‚ § Rf = 5.39% based on the current 10 year yield for the sake of consistency with the forecasted 10 year FCFF. ï‚ § Calculating risk premium based on arithmetic average vs geometric mean: ïÆ' ¼ Arithmetic average assumes no serial correlation and thus could be overstating the premium. ïÆ' ¼ Arithmetic average ignores estimation error and available data is limited. ïÆ' ¼ Arithmetic average works best forShow MoreRelatedCase Study –Nike, Inc.: Cost of Capital Essay718 Words   |  3 PagesCase Study –Nike, Inc.: Cost of Capital FIN202a-Spring 2011 1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components. WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity. It is a critical input for evaluating investment decision, and typically the discount rate for NPV calculation. And it serves as the benchmark for operating performance, relative toRead MoreCase Study on Nike1252 Words   |  6 PagesCase Study Nike Introduction Good morning ladies and gentlemen and thank for taking the time to meet with us. Nike was founded on January 25, 1964 as Blue Ribbon Sports by Bill Bowerman and Philip Knight. The company officially became Nike, Inc. on May 30, 1978. Nike has various products which include footwear as well as other apparel that compliment the former. This accounts for 92 percent of the company’s revenue. The other 8 percent comes from equipment and non Nike brand products, such as ColeRead MoreEssay on NIke solutions1702 Words   |  7 Pages(1+KD/2)40  +  3.375(1-0.38)/(1+KD/2)n KD=4.52% C6: Using WACC formula: Rwacc  =4.52*10.19% + 8.89*89.81% = 8.44% C7: average dividend growth rate: g = [0+12.5++ 20+12+8]/4 %=8% (Assumption: In this calculation, the growth rates significantly higher than 20% and negative figure have been ignored.) C8: Using CAPM: KE’=3.2%+0.91*5.5%=8.21% C9:  Using DGM formula: P’=D1/ (KE’-g) =1.06*(1+8%)/(8.21%-8%)=$545 In Nike’s case, when Joanna Cohen calculated the WACC of Nike, she made several mistakes and led to a wrongRead MoreNike Cost of Capital Case2415 Words   |  10 Pagesmanagement firm. In July 2001, Ford considered buying shares of Nike, Inc., the 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 reactionsRead MoreCalculating Wacc2481 Words   |  10 Pagesweighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement: a) Weighting of Capital Structure: Use of book values of capital rather than the market values b) Cost of Debt Calculation: Incorrect method for calculating debt c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firms marginal tax rate 2. Revised Calculation of WACC: WACC reflects the weighted averageRead MoreNike Inc Cost of Capital2974 Words   |  12 PagesIntroduction Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (â€Å"Nike†) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market. Ford has done a significant amount of research through analysts’ reportsRead MoreDeutsche2679 Words   |  11 Pages Phone: (403) 332-4582 e-mail: oz.palasvirta@uleth.ca Goal of Course Management 4430 is the capstone course in finance and will incorporate concepts you have learned in through your study of corporate, investments, and international. We will utilize the case methodology to focus our analysis. Cases describe a context in which a particular problem is found. Regardless of the particular characteristics of the problem, problem solving follows a general methodology: identification of theRead MoreFinancial Report Adidas5972 Words   |  24 PagesStudent number: 0880732 Term paper Handelshà ¸yskolen BI - Adidas AG - Exam code and name EXC 25093 Financial Statements and Valuation Hand-in date: 15.04.2011 Place of study: BI Oslo Program: Bachelor in Business and Administration Table of contents Summary ii Adidas 1 Sports Apparel Industry 1 Economic Situation 2 - Financial Statement Evaluation 2 - Profitability ratios 3 - Efficiency ratios 4 - Liquidity and cash flow ratiosRead MoreManagerial Economics Paper2648 Words   |  11 PagesSection A: Objective Type (30 marks) †¢ †¢ †¢ This section consists of multiple choices Short notes type questions. Answer all the questions. Part one carries 1 mark each Part two carries 5 marks each. MM.100 Part one: Multiple choices: 1. It is a study of economy as a whole a. Macroeconomics b. Microeconomics c. Recession d. Inflation 2. A comprehensive formulation which specifies the factors that influence the demand for the product a. Market demand b. Demand schedule c. Demand function d. IncomeRead MoreKraft Foods Analysis12781 Words   |  52 Pagesand immediately Kraft Foods’ results and market shares. MARKET POSITION COMPETITORS Krafts Foods is the second larger food company after Nestlà © in terms of volume of products sold and the first one in the United States. According to a recent study of Deloitte, in terms of turnover Kraft Foods is the fourth larger company in the world in the food beverages industry. The ranking is as follow: 1. NESTLE SA – Switzerland Chocolates, waters, dairy products, ice-creams, confectionery, frozen