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FINANCE

NIKE, INC. : COST OF CAPITAL

SYNDICATE 10
Erryn M. Paramytha
29115016
Joshua Marvel L G
29115314
Mila Mujaadilah
29115053
Ridho Riadi Akbar
29115193

YP 53 B

SCHOOL OF BUSINESS AND MANAGEMENT


MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2016

Background
Kimi Ford, a portofolio manager in NorthPoint group, a mutual-fund management firm
analyze Nikes share price. In the beginning of the year Nike share price had declined
significantly. Ford considered to buy shares for the fund she managed. In 2000 fund earned a
return of 20,7% even as the S&P 500 fell 10,1%. At the end of June 2001, the fundstear to date
returns stood at 6,4% versus 7,3% for S&P 500.
On June 28, 2001,Nike held an analyst meeting to ths close its fiscal year 2001 results. Nike
management wanted to revitalize the company.
The Performance of Nike for Several Years
Revenue
Since 1997

Net income
Market Share

$ 9 billion
Fallen $ 800 million to $ 580 million
(1997) 48% to (2000) 42%

Supply chain issues and the adverse effect of strong dollars negatively affected revenue. To
boost revenue, the company would develop more athletic shoe products in the midprice segment,
a segment that Nike had overlooked in recent years. Nike also plan to push its apparel line. On
the cost side Nike would exert more effort on expense control. Finally, company executive
reiterated their long-term revenue growth target of 8%-10% and earnings-growth target above
15%. Kimi Ford has done a cash flow estimation, and ask her assistant, Joanna Cohen to
estimate cost of capital.

Problem
Significantly Decline of Nikes share price from the beginning of the year.
In 2000, the fund earned a return of 20,7%, even as the S&P 500 fell 10.1%.
At the end of June 2001, the funds year to date returns stood at 6,4% versus 7,3% for the
S&P 500.
Nike market share in US athletic shoes fallen from 48% to 42% in 2000.
Ford must considered to buying shares for the fund that she managed.

Analysis
Value of Equity (E)
Given :
Stock Price
Number of Share Outstanding

= $ 42.09
= $ 273.3

Market Value of Equity (E)

= Stock Price x Number of Share Outstanding


= $ 42.09 x $ 273.3
= $ 11503.197

Value of Debt (D)


Given :
Long-term Debt
Value of Debt (D)

= $ 435.9
= Long Term Debt
= $ 435.9

Weight of Debt (WD)


Given :
Value of Debt (D)

Preferred Stock

Equity (E)
Total

Weight of Debt (WD)


= 435.9
= Common Stock + Retained Earnings
=11503.197 + 3194.3
= 14697.497
= 0.3
= D+E+ Preferred Stock
= 435.9 + 0.3 + 14697.497
= 15133.697
= D/(D+E)
= 435.9 / (435.9 + 11503.197)
= 0.0364
= 3.64 %
Weight of Equity (WE)
Given :
Value of Equity (E)
Value of Debt (D)

= 11503.197
= 435.9
= E/(D+E)

Weight of Equity (WE)


= 11503.197 / (435.9 + 11503.197)
= 0.9635
= 96.35%

Cost of Debt