Nike case study
INTRODUCTION:
A portfolio manager at North Point Large cap Fund, Kimi Ford, considers buying shares of Nike, Inc. for her mutual fund management firm. In the mid of 2001, Nike arranges for an analyst meeting to disclose its Fiscal year results and also to discuss on renewing its strategies to boost its sales growth, profits and market share which were all declining. To cope from the situation it decides to develop athletic shoes in the mid-price segment, enhance revenues from its apparel line and also commits to control its expenditure. When Ford realizes that the market analysis had mixed reactions, she generates her own estimates of cash flows from the available data and asks her assistant Joanna Cohen to estimate cost of capital.
JOANNA COHEN’S ESTIMATION OF COST OF CAPITAL:
Joanna considers the following parameters to estimate the value by using WACC, which are, whether to use single or multiple cost of capital, capital structure, cost of debt and cost of equity.
SINGLE OR MULTIPLE COST OF CAPITAL
To use single cost of capital for estimation of WACC is a correct approach since most products have similar risk factor and they usually complement one another. We assumed Nike Inc. to have a single cost of capital since its multiple business segments (shoes, apparel, sports equipment, etc.) are not very different and would experience similar risks and betas
CAPITAL STRUCTURE
Cohen has estimated the weights using the book value of equity and debt. This is an incorrect approach to estimate the equity weight because market values are to be used. The market values can be estimated by taking the number of outstanding shares and multiplying it with price per share. Usage of book value of debt is accepted as an estimate of market value since they are somewhat similar to book values, but Cohen considers data only pertaining to 2001 to calculate this parameter. To get a better estimate of firm’s debt, average values of 2000 and 2001 can be used.
COST OF
A portfolio manager at North Point Large cap Fund, Kimi Ford, considers buying shares of Nike, Inc. for her mutual fund management firm. In the mid of 2001, Nike arranges for an analyst meeting to disclose its Fiscal year results and also to discuss on renewing its strategies to boost its sales growth, profits and market share which were all declining. To cope from the situation it decides to develop athletic shoes in the mid-price segment, enhance revenues from its apparel line and also commits to control its expenditure. When Ford realizes that the market analysis had mixed reactions, she generates her own estimates of cash flows from the available data and asks her assistant Joanna Cohen to estimate cost of capital.
JOANNA COHEN’S ESTIMATION OF COST OF CAPITAL:
Joanna considers the following parameters to estimate the value by using WACC, which are, whether to use single or multiple cost of capital, capital structure, cost of debt and cost of equity.
SINGLE OR MULTIPLE COST OF CAPITAL
To use single cost of capital for estimation of WACC is a correct approach since most products have similar risk factor and they usually complement one another. We assumed Nike Inc. to have a single cost of capital since its multiple business segments (shoes, apparel, sports equipment, etc.) are not very different and would experience similar risks and betas
CAPITAL STRUCTURE
Cohen has estimated the weights using the book value of equity and debt. This is an incorrect approach to estimate the equity weight because market values are to be used. The market values can be estimated by taking the number of outstanding shares and multiplying it with price per share. Usage of book value of debt is accepted as an estimate of market value since they are somewhat similar to book values, but Cohen considers data only pertaining to 2001 to calculate this parameter. To get a better estimate of firm’s debt, average values of 2000 and 2001 can be used.
COST OF