Case Study on Nike
Case 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 Cole Haan. When we were considering on whether it was more appropriate to use multiple cost of capitals for each segment we believe that they all mostly share similar risk factors. We therefore decided to calculate two different costs of capitals, one using the geometric and the other using the arithmetic method. We believe that Joanna Cohen’s methodology in determining if Nike is currently under or overvalued was incorrect. Today we will show you the mistakes that she made and where we believe there was room for improvement. Finally our analysis will prove that Nike is undervalued and that it’s a strong buy.
Mistakes
Joanna Cohen made a few mistakes as she conducted her analysis for the cost of capital for Nike. The first mistake that Ms. Cohen made was that she used book values instead of the market values when computing the weights for the WACC. The second mistake that she made was that she calculated the cost of debt using historical values. We calculated the yield in maturity of the debt as the bond doesn’t mature until the year 2021 but instead of using book values for equity we calculated the market value of equity as well. The third mistake that was made was Ms. Cohen’s method in choosing the beta. She used the average beta, which is not the most precise beta considering the fact that Nike has been relatively volatile in the financial markets in recent years. The fourth mistake that Ms. Cohen made in deciding what market risk premium to use, she only chose one
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 Cole Haan. When we were considering on whether it was more appropriate to use multiple cost of capitals for each segment we believe that they all mostly share similar risk factors. We therefore decided to calculate two different costs of capitals, one using the geometric and the other using the arithmetic method. We believe that Joanna Cohen’s methodology in determining if Nike is currently under or overvalued was incorrect. Today we will show you the mistakes that she made and where we believe there was room for improvement. Finally our analysis will prove that Nike is undervalued and that it’s a strong buy.
Mistakes
Joanna Cohen made a few mistakes as she conducted her analysis for the cost of capital for Nike. The first mistake that Ms. Cohen made was that she used book values instead of the market values when computing the weights for the WACC. The second mistake that she made was that she calculated the cost of debt using historical values. We calculated the yield in maturity of the debt as the bond doesn’t mature until the year 2021 but instead of using book values for equity we calculated the market value of equity as well. The third mistake that was made was Ms. Cohen’s method in choosing the beta. She used the average beta, which is not the most precise beta considering the fact that Nike has been relatively volatile in the financial markets in recent years. The fourth mistake that Ms. Cohen made in deciding what market risk premium to use, she only chose one