# Nike Case Study

Powerful Essays
1534 Words
Grammar
Plagiarism
Writing
Score
Nike Case Study
INTRODUCTION
• Kimi Ford, a portfolio manager of a large mutual fund management firm, is looking into the viability of investing in the stocks of Nike for the fund that she manages.
• Ford should base her decision on data on the company which were disclosed in the 2001 fiscal reports. While Nike management addressed several issues that are causing the decrease in market sales and prices of stocks, management presented its plans to improve and perform better.
• Third party sources also gave their opinions on whether the stock was a sound investment.
WACC CALCULATION:
Cost of Capital Calculations: Nike Inc
Cohen calculated a weighted average cost of capital (WACC) of 8.3 percent by using the capital asset pricing model (CAPM) for Nike Inc. I do not agree with her figure, and the reasons to that are as follows:
Value of equity
The problem with Cohen’s calculations is that she used the book value for both debt and equity. While the book value of debt is accepted as an estimate of market value, book value of equity should not be used when calculating cost of capital. The market value of equity is found by multiplying the stock price of Nike Inc. by the number of shares outstanding.
Market Value of Equity(E) Calculation:
E = Stock Price X Number of Shares Outstanding = \$42.09 X 271.5 = \$11,427.44
This figure is much different than the book value of equity that Joanna Cohen used (\$3,494.50).
Value of Debt
Market value of debt should be used in the calculation of the cost of debt contrary to a book value used by Cohen. She should have discounted the value of long-term debt that appears on the balance sheet. The market value of debt is found by adding the current portion of long-term debt, notes payable, and long- term debt discounted at Nike’s current coupon.
Market Value of Debt D = Current LT + Notes Payable + LT Debt (discounted)
= \$5.40 + \$855.30 + \$416.72
= \$1,277.42
Using these figures, we can now find the market value of Nike Inc.,

## You May Also Find These Documents Helpful

• Satisfactory Essays

In order to understand why the book value of an asset likely to be different from the current market value of the asset, one must first understand the terms. Palmiter, A. R. (2003), describes, “Book value is simply the amount that the company's assets (net of depreciation, depletion and amortization) and total liabilities -- as carried on the company's balance sheet. (Sometimes book value is referred to as net book value, net worth or shareholders' equity.) Taking the value of real assets and subtracting any debt can determine the book value. The current market value…

• 315 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

Market value weights are better for calculating the firms weighted average cost of capital because they are forward-looking and based on what the asset is expected to produce in the future. Book values reflect historical costs.…

• 1477 Words
• 8 Pages
Satisfactory Essays
• Powerful Essays

The most obvious reason for the difference between the market value of equity and the book value of equity is the inability to record certain intangible assets such as brand value, customer loyalty, and perhaps most importantly, human capital. These intangible assets are likely to provide tremendous earnings growth in the future which determines the company’s market value. Notice also that the company’s choice of conservative accounting policies has the effect of depressing the company’s book value of equity.…

• 935 Words
• 4 Pages
Powerful Essays
• Better Essays

Lynch, M. (2009). Nike Profits Drop 30.4% In Qtr. WWD: Women 's Wear Daily, 197(133), 14-1NULL. Retrieved August 6, 2010 from Business Source Premier database.…

• 1986 Words
• 8 Pages
Better Essays
• Powerful Essays

This paper is a case study of Nike Inc. I will give a brief overview of the history, products, company goals, company challenges, financial report and sourcing strategies. My main sources of information are internet databases, company annual reports, and financial articles.…

• 1486 Words
• 6 Pages
Powerful Essays
• Better Essays

Cohen’s book value of equity is the total shareholder’s equity in the balance sheet, \$3494.5. The market value of equity on the other hand, is \$11427; computed using stock price X number of shares outstanding (\$42.09*271.5 million shares), which is also commonly exercised computing market capitalization of a company in an industry. The book value of equity used by Cohen is very different from the market value of equity. Therefore the weight of debt and equity also differ greatly. Cohen found that Nike is financed by 27% on debt and 73% on equity, but using the market value to better reflect Nike’s debt and equity, I found that Nike is financed by 10.19% on debt and 89.81% on equity. The differences are bigger than it looks, as we are talking about millions of dollars being calculated inaccurately, so it is important for portfolio managers like Kimi Ford to carefully assess the assumptions that are needed to calculate the cost of capital of Nike.…

• 1183 Words
• 5 Pages
Better Essays
• Better Essays

Nike Corporation released its financial statement for the year ended May 2014. Nike Inc. is a sports apparel manufacturing firm with diverse interests all over the world. The financial statements suggest a strong company whose stocks are not undervalued, but with the potential of exploding higher having shown sustained strengths when the Europe, American, and Chinese economies were at the brink of disaster. Despite sustaining fluctuations from the weakening of the strong economies, the company continued to register an increase in revenues in the financial period 2012-2013 and 2013-2014. It also registered an increase in its net income in the same financial periods.…

• 728 Words
• 3 Pages
Better Essays
• Better Essays

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…

• 3049 Words
• 13 Pages
Better Essays
• Powerful Essays

mostly in Fortune 500 companies with an emphasis on value investing. Its top holdings included…

• 1776 Words
• 28 Pages
Powerful Essays
• Powerful Essays

The basic problem for the Nike, Inc.: Cost of Capital case lies on whether or not Nike is a good match for the NorthPoint Large-Cap Fund. Kimi Ford, the portfolio manager, has to decide if Nike is a value-investing company that will contribute to the outstanding performance of the fund. In order to evaluate Nike as a viable choice, Kim has to calculate the cost of capital for the company and make sure assumptions are a direct function from the estimates. The cost of capital calculation or WACC helps to see if an investment is worthwhile to undertake. However, the assumptions made to calculate WACC, in this case, are the underlying problem because some of the assumptions made are incorrect.…

• 1397 Words
• 7 Pages
Powerful Essays
• Good Essays

We have calculated BV(Debt) and taken proxy for MV(Debt), for equity we have considered market value…

• 347 Words
• 2 Pages
Good Essays
• Good Essays

Market capitalisation is a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions. That’s why this value will be most likely higher than the book value, which can only express monetary issues. Therefore the book value doesn’t reflect customer loyalty, value of a brand name or research and development. Balance sheet doesn’t include information about future plans and strategies which hugely influence market value.…

• 551 Words
• 3 Pages
Good Essays
• Satisfactory Essays

This report is a crucial resource for industry executives and anyone looking to access key…

• 1131 Words
• 7 Pages
Satisfactory Essays
• Powerful Essays

Nike’s has long-term of financial goal to be achieve which are high single-digit revenue growth, mid-teens earnings per share growth, increased return on invested capital and accelerated cash flows, and consistent results through effective management of Nike diversified portfolio of businesses. This long-term strategy had been adopted since 2001 and as a result, Nike’s revenues and earnings per share have grown 9% and 14% respectively. At the same time, the company return on invested capital also increased from 14% to 18%. On 2009, revenues of the company grew 3% to \$19.2 billion while net income had decreased 21% to \$1.5…

• 2429 Words
• 10 Pages
Powerful Essays
• Satisfactory Essays

Market Value of Equity = Stock Price x Number of Shares - Total Book Value of Equity…

• 606 Words
• 3 Pages
Satisfactory Essays