Nike Inc Cost Of Capital Study Mode
Nike Inc. – Cost of Capital & Stock Valuation
Steven Seagal
George Clooney
Brad Pitt
Background
Nike Inc's share price has declined considerably over the past few years and Kimi Ford, fund manager of NorthPoint Lager-Cap Fund, was considering investing in the stock. Nike was looking to revitalize itself by addressing both top-line growth and operating performance. The goal was to improve revenues that had plateaued, and increase profits that had decreased over the years. One of its strategies to do so was by introducing a mid-priced shoes segment. Nike had revenue growth targets of 8 to 10% and earnings growth target of above 15%, which some analysts deemed as extremely aggressive, and unrealistic but, others considered it realistic.
Kimi Ford's problem
Kimi Ford could not get a clear idea of whether to buy Nike's shares. The opinions from the analysts of the industry were mixed, which prompted her to do a discounted cash flow analysis. However, she was uncertain about the cost of capital to be used for this analysis. She asked her assistant, Joanna Cohen, to estimate Nike's cost of capital. Below is what Joanna did and our comments on it.
Our Views on Joanna's Analysis
1. Single or Multiple cost of capital? The argument provided by Johann Cohen seems appropriate and well-reasoned. Even though Nike Inc. has different segments such as apparel, sports equipment’s etc in addition to its athletic shoes, all of these essentially make up the sports business and hence, it would be safe to assume a uniform cost of capital for Nike Inc, neglecting the miniscule contribution of Cole-Haan. 2. Cost of Debt Johanna Cohen has based her analysis of cost of debt on the book value of the debts and the corresponding interest expenses. However, a company’s cost of capital is forward looking and based on current conditions. By contrast, the interest rate on existing debt is historical and set under different conditions. A better
Steven Seagal
George Clooney
Brad Pitt
Background
Nike Inc's share price has declined considerably over the past few years and Kimi Ford, fund manager of NorthPoint Lager-Cap Fund, was considering investing in the stock. Nike was looking to revitalize itself by addressing both top-line growth and operating performance. The goal was to improve revenues that had plateaued, and increase profits that had decreased over the years. One of its strategies to do so was by introducing a mid-priced shoes segment. Nike had revenue growth targets of 8 to 10% and earnings growth target of above 15%, which some analysts deemed as extremely aggressive, and unrealistic but, others considered it realistic.
Kimi Ford's problem
Kimi Ford could not get a clear idea of whether to buy Nike's shares. The opinions from the analysts of the industry were mixed, which prompted her to do a discounted cash flow analysis. However, she was uncertain about the cost of capital to be used for this analysis. She asked her assistant, Joanna Cohen, to estimate Nike's cost of capital. Below is what Joanna did and our comments on it.
Our Views on Joanna's Analysis
1. Single or Multiple cost of capital? The argument provided by Johann Cohen seems appropriate and well-reasoned. Even though Nike Inc. has different segments such as apparel, sports equipment’s etc in addition to its athletic shoes, all of these essentially make up the sports business and hence, it would be safe to assume a uniform cost of capital for Nike Inc, neglecting the miniscule contribution of Cole-Haan. 2. Cost of Debt Johanna Cohen has based her analysis of cost of debt on the book value of the debts and the corresponding interest expenses. However, a company’s cost of capital is forward looking and based on current conditions. By contrast, the interest rate on existing debt is historical and set under different conditions. A better