1.0 Summary of case study
NorthPoint Group is a mutual fund management firm which invested mostly in Fortune 500 companies. Its top holding included ExxonMobil, General Motors, McDonald’s, 3M and other large cap. NorthPoint Group performed extremely well although the stock market had declined over 18 months. In 2000, it earned a return of 20.7% while the S&P 500 fell 10.1%. At June 2001, NorthPoint Group’s return stood at 6.4% while the S&P 500 stood at -7.3%. Nike, Inc. is an American multinational corporation which is founded on January 25, 1964 as Blue Ribbon Sports by Bill Bowerman and Phil Knight and officially became Nike, Inc. on May 30, 1978. The company is engaged in the design, development and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. The headquarter of the company is near Beaverton, Oregon, in the Portland metropolitan area, and is one of only two Fortune 500 companies headquartered in Oregon. It is the world's leading supplier of shoes and apparel and a major manufacturer of sports equipment, with revenue in excess of US$24.1 billion in its fiscal year 2012 with an ending May 31, 2012. As of 2012, it employed more than 44,000 people worldwide. The brand alone is valued at $10.7 billion making it the most valuable brand among sports businesses. On July 5, 2001, Nike’s share price had declined significantly from the beginning of the year while Kimi Ford, a portfolio manager at Northpoint Group, a mutual fund management firm, pored over analysts’ write-up of Nike Inc. On June 28, 2001, Nike held an analysts’ meeting to disclose its fiscal year 2001 results with another purpose of Nike management wanted to communicate a strategy for revitalizing the company. In the meeting, management revealed plans to address both top-line growth and operating performance. In 1997, the revenue of Nike Inc. was stable around $9 million while the net income has declined from $800 million to $580 million. Nike Inc. market share had fallen from 48%, in 1997, to 42% in 2000. Nike Inc. recent supply chain issues and the adverse effect of a strong dollar had negatively affected revenue. Company executives reiterated the company’s long term revenue growth targets of 8% to 10% and targeted the earnings growth up to 15%. Kimi could find about the June 28 meeting gave her no clear guidance which having different recommend among the analysts. So, she decided to develop her own discounted cash flow forecast to get a clear conclusion. In her forecast, Nike Inc. was overvalued with the current share price of $42.09 when the discount rate was 12%. However, she found that Nike Inc. was undervalued when the discount rate was below 11.17%. So, Kimi Ford has asked her assistant, Joanna Cohen to estimate the cost of capital of Nike Inc. 2.0 Objective
There are three objectives in the case study “Nike, Inc.: Cost of Capital”. The first objective is to explain the importance of cost of capital. Why cost of capital is important in deciding the allocation of share for NorthPoint Large-Cap Fund. The second objective is to identify the appropriate method in estimating the cost of capital and carry out the proper calculation. Besides that, Cohen’s analysis is being compared in order to identify the error. The third objective is to make investment decision whether to include Nike’s share in NorthPoint Large-Cap Fund. Nike’s share price is evaluated using cost of capital and make appropriate suggestion: buy, hold or sell. 3.0 Introduction
From the case study, Nike Inc. is the listed company that under consideration, whether it is worth to invest in or not. Kimi Ford, a portfolio manager in North Point Large-Cap Fund was act as decision maker for this case. She done her in-depth analyze on Nike Inc. and read through all the analysts’ report against the performance for Nike. From those reports, it is confusing Kimi because Lehman Brothers is recommended to invest in Nike while UBS Warburg and CSFB are...
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