Nike, Inc.: Cost of Capital
A Case Brief Submitted to
In Partial Fulfillment of the Requirements for
September 28, 2011
This case highlights Kimi Ford, a portfolio manager with NorthPoint Group, a mutual-fund management firm. She managed the NorthPoint Large-Cap Fund, and in July of 2001, was looking at the possibility of taking a position in Nike for her fund. Nike stock had declined significantly over the previous year, and it appeared to be a sound value play. Nike had held an analysts’ meeting one week earlier to release the company’s fiscal results for 2001. Apparently Nike had an ulterior motive; the management wanted this opportunity not only to release their fiscal results, but to convey a strategy to revitalize the company as well. Revenues had been relatively flat since 1997, and net income had decreased over that time (EXHIBIT 1). They had lost 6% of the market share, realized some supply-chain problems, and were suffering negative effects as a result of the strengthening U.S. dollar. At the analysts’ meeting Nike unveiled plans to remedy both the revenue growth, or lack of, and the operating performance. The company planned to grow revenues through the development of more mid-priced athletic shoe products, and by putting more emphasis on their apparel line. Nike also stated that they would be more focused on controlling their expenses. In addition to this, Nike’s executives reaffirmed their long-term revenue-growth targets of 8% to 10% and earnings growth targets of more than 15%. The analysts’ had mixed reactions. While some thought that Nike might be a bit aggressive with their growth targets, others felt there were real growth opportunities in apparel and the international business. Ms. Ford read all the reports covering the analysts’ meeting and could not see any clear consensus. So, she decided to create her own discounted cash flow forecast. Her forecast (EXHIBIT 2)...
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