We recommend a buy for Nike's stock on July 6, 2001. Our analysis consists of a discounted cash flows model. We projected unlevered free cash flows over the next 10 years and discounted them according to our derivation of Nike's weighted average cost of capital. Our analysis suggests the stock is significantly undervalued, given our expectation it will deliver earnings in the future. Below we have analyzed Joanna Cohen's WACC calculation and her projection of cash flows. We then calculate our own WACC, discuss the results of our own model for cash flow projections, and conclude with our valuation and notes regarding our recommendation.

Evaluation of Joanna Cohen's WACC Calculation
Cohen's WACC calculation is decent, but has a few issues, and a number of errors, as described below. •Weighting the capital structure. She weights the capital structure using the book value of equity. Nike is a public company, and its market capitalization is a more relevant metric for equity than the book value of equity. •Cost of debt. To calculate the cost of debt, Cohen simply divides the interest expense by the average balance of the interest-bearing debt. This is an approximation for the true cost of the debt, but is too inaccurate. The interest expense line may include expenses not directly related to the debt of the company (unlikely, but perhaps non-cash payment-in-kind expenses for the preferred stock, or simply interest expense recognized under GAAP, but not necessarily indicative of real costs of debt). The cost of debt should include the current market yield on Nike's publicly traded debt, as this is a more pertinent metric. Furthermore, Cohen uses the 20 year yield on treasury bonds to approximate the risk free rate. We feel that the 3-month yield on treasuries is appropriate.

...evaluating Nike, Inc. (“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’ reports, which had mixed reviews. She found no clear guidance from the analysts and decided to develop her own discounted cash flow forecast to come to a conclusion. Her forecast showed that Nike was overvalued at its current share price causing a discount rate of 12%; however, a quick sensitivity analysis showed that Nike was undervalued at a discount rate below 11.17%.
Ford then asked her assistant, Joanna Cohen, to estimate Nike’s cost of capital, which, per Cohen’s analysis, came to 8.4%.
Background
The cost of capital is the minimum return that a company should make on an investment or the minimum return necessary for investors to cover their cost. Two main factors of the cost of capital are the cost of debt and the cost of equity.
The capital used for funding a business should earn returns for the investors who risk their capital. For an investment to be...

...NikeCost of Capital Analysis
October 22, 2010
1
I. Introduction
In this case analysis Kimi Ford, a portfolio manager for a large cap value mutual fund, NorthPointGroup is considering adding shares of Nike, Inc., an athletic shoe manufacturer as a new position in her fund. On July 5, 2001, Nike's share price had declined significantly since the beginning of the year. Although the market in general had declined over the last 18 months as well, NorthPoint Large-Cap Fund had firmly out- performed the market. Kimi had read mixed reports from the analysts, and decided to do her own discounted cash flow forecast for Nike, in order to come to a clearer conclusion. Her forecast showed that at discount rates below 11.17% Nike was undervalued. She asked her assistant to calculate cost of capital, and her assistant's analysis of the weighted average cost of capital was given in a memo to Kimi. On a closer look at her assistant’s analysis, the numbers used for the analysis appear to be wrong based on several of her assumptions in the calculation. My analysis of the WACC numbers, and the risks and return for potentially purchasing Nike shares for the portfolio follow in the report below.
II. Analysis...

...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?
WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an investment is worth it or not based on the weights of debt and equity.
Why WACC is important
* To decide what projects to accept or reject. Rate of return should be equal to or greater than company cost of capital
* Knowing cost of debt and cost of equity helps a company determine how they should be structured and whether more financing should come from equity or debt
I do not agree with Cohen’s calculation for WACC. While some of her calculations were good, I think that there were some that she could have used different numbers and rates to come up with more accurate numbers.
WACC=(E/(D+E)) Ke + (D/(D+E)) Kd (1-t)
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions
Cost of debt-based on yield to maturity
PMT= 100(.0675)=6.75...

...Nike, Inc.: Cost of Capital
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?
The WACC of a firm is the overall required return on the firm as whole. It is the discount rate to use for cash flows with risk that is similar to the overall firm. The WACC lets you see how much interest the company has to pay for every dollar it finances. The WACC of a firm increases at the Beta and rate of return on equity increases. A decrease in WACC indicates a decrease in valuation and a higher risk. When the capital structure changes, the WACC will change in a U shape pattern. Debt is considered less risky than equity, so equity cost is usually higher than the cost of debt. The lowest WACC is the optimal capital structure.
• Joanna used the book value of equity when she should have used the market value of equity. Which is equal to the number of outstanding shares multiplied by the price. This will change her weight of debt calculation.
• She used the book value of debt, which is ok because it is usually close to the market value.
• The cost of debt she used was the total interest expense for the year divided by the average debt balance. She should have divided the total interest expense by the long term debt of the company.
• The tax rate that...

... 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 reactions to the projections. Ford was right to come up with her own forecast, seeing as the reactions ranged from too aggressive to growth opportunities.
In order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is...

...Nike, Inc.: Cost of Capital
Case 15
Financial Administration
FINC 5713-180
Team 1
Fall 2013.
October 8, 2013.
Introduction
Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shares from Nike, inc even if it’s share price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the decline in the stock market over the last 18 months. Kimi therefore surveyed the results of Nike’s fiscal-year 2001which had been revealed a week earlier.
Issues that caused a decline in market sales as revealed by the management of Nike
1. Revenues since 1997 had stopped growing but remained around $9.0 billion.
2. The net income had fallen from $800m to $580m a decline of $220 million.
3. Nike’s market share in the U.S. athletic shoe industry had fallen from 48 percent in 1997 to 42 percent in 2000 (6% decline)
4. The issue of Supply-chain and strong dollar exchange rate also affected the revenue negatively.
Nike’s Strategic plan to address the above issues
1. Increase revenues by developing more athletic-shoe products in the mid-priced range.
2. Push its apparel line which had performed tremendously well.
3. Exert more expense control on the cost side.
4. Nike’s executives expressed...

...Executive summary
In this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC).
In our analysis, we examine why WACC is important in decision making and we show how WACC for Nike Inc. is calculated correctly. Also, we calculate the company's cost of equity using three different models: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price), we analyze their advantages and disadvantages and finally we conclude whether or not an investment in Nike is recommended.
Our analysis suggests that Nike Inc.'s common stock should be added to the North Point Group's Mutual Fund Portfolio.
I. The Weighted Average Cost of Capital and its Importance for Nike Inc.
The Weighted Average Cost of Capital (WACC) is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By...

...1. Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital.
Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used book equity, which was $3,494,500,000. Since Nike is a publicly traded company, the stock price should be multiplied by the number of shares outstanding in order to get the true equity of the firm. 271,500,000 multiplied by $42.09, would give you $11,427,435,000 in equity.
In Ms. Cohen’s calculation debt was 27% of total financing and equity was 73%. When using market value for equity those numbers change to 10.2% for debt and 89.8% for equity.
2. Using the following numbers and inputs, our WACC is 9.53%:
To calculate the cost of debt the yield of Nike’s publicly traded debt is utilized:
● N = 40 (semi-annual coupon, 2 x 20)
● PV = $95.60
● PMT = 3.375 (semi-annual coupon, half of 6.75)
● FV = 100 (Amount of debt in future)
Inserting the numbers above in our calculations result in 3.583724 for the I/YR which is multiplied by two to get an annual rate of...

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