Case note on Nike Cost of Capital
Group 2 Members : Devendra Rane, Vivekkumar Nema, Chandrashekhar Joshi, G. Ajithkumar, Prakash Shetty Case Background:
* NorthPoint Large Cap Fund weighing whether to buy Nike’s stock. * Nike has experienced sales growth decline, declines in profits and market share. * Nike has revealed that it would increase exposure in mid-price footwear and apparel lines. It also commits to cut down expenses. * Kimi Ford’s initial assessment at a discount rate of 12% showed Nike as overvalued at $42.09. However it should undervalued at discount rates below 11.2% * The market responded mixed signals to Nike’s changes. Kimi Ford has done cash flow estimation, and asks her assistant, Joanna Cohen to estimate cost of capital. WACC Methodology:
* The weighted average cost of capital (WACC) is the rate (expressed as a percentage, like interest) that accompany is expected to pay to debt holders (cost of debt) and shareholders (cost of equity) to finance its assets. * It is the minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital. * The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost. * Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC. * The WACC is set by the investors (or markets), not by managers. Therefore, we cannot observe the true WACC, we can only estimate it.
WACC formula: WACC = (E/V). Ke + (D/V). Kd . (1-T)
* V = D + E = Total Capital
* D: Amount of Debt
* E: Equity
* Kd: Cost of Debt
* Ke: Equity
* T: Tax rate
Do you agree with Joanna Cohen’s WACC estimations? Why or why not? Cohen calculated a weighted average cost of capital (WACC) of 8.4% by...
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