NIKE, INC.

: COST OF CAPITAL

STRATEGIC MANAGEMENT
CASE PRESENTATION
Drs. Sinyo James Laoh, PH.D
YOUSANIA RATU SIMBIAK
(Lecturer)
YORITA SAPTENNO
Yousania
JONATHANRatu Simbiak
NAJOAN
Yorita Saptenno
Jonathan Najoan
 EXECUTIVE SUMMARY
Kimi Ford reviewing financials of Nike Inc. to
consider buying shares
The problem:
Should Kimi Ford buy Nike’s stock price right
time now or not?
Kimi ask Cohen to calculate the Nike’s WACC to
determine the actual current stock price
What is our suggestion to Kimi Ford?
INTRODUCTION
 NORTHPOINT INTRO
Mutual fund firm
Kimi Ford (Portfolio Manager)
It invests money mostly in fortune 500
companies
Its top holdings include:
Exxon Mobile, General Motors, McDonald, 3M
and other large cap
 NORTHPOINT INTRO
Stock market declined over the last 18 months
Performed extremely well
In 2000, Earned a return of 20.7% - S&P 500
fell 10.1%
At the end of June 2001, Year-to-Date Returns
stood at:
6.4% versus minus 7.3% for the S&P 500
 NIKE INTRO
Athletic-shoe manufacturer
Revenue:
• Footwear 62%
• Apparel 30%
• Equipment products 3.6%
 sports balls, timepieces, eyewear, skates, bats, and
other
• Non-Nike brands 4.5%
 Cole-Haan dress and casual footwear, ice skates,
skate blades, hockey sticks, hockey jersey, and
other products under the Bauer trademark
 NIKE INTRO
Since 1997, its revenues had plateaued at
around $9 billion
Net income had fallen $206 million from:
 $795.8 million to $589.7 million (Exhibit 1)
Market share in U.S. athletic shoes had fallen
from:
48% in 1997 to 42% in 2000
Exhibit 1
 NIKE INTRO
Adverse effect of a strong Dollar had negatively
affected revenue
Concerned about the top-line growth and
operating performance
To boost revenue:
The company would develop more athletic-shoe
products
Mid–Priced segment - a segment that nike had
overlooked in the recent years
 NIKE INTRO
Planned to push its apparel line
Planned to exert more effort on the expense
control
Long-term revenue growth target: 8%-10%
Earning growth target: 15%
 KIMI FORD ABOUT NIKE
Read all the analysts reports but gave her no
clear guidance
Decided to develop her own discounted cash
flow forecast
At a discount rate of 12%, Nike was overvalued
at its current share price of $42.09 (Exhibit 2)
But, a quick sensitivity analysis revealed Nike
was undervalued at discount rates below 11.17%
Exhibit 2
Exhibit 2
Exhibit 2
 KIMI FORD ABOUT NIKE
Assigned Joanna Cohen to estimate Nike’s cost
of capital.
Gathered all the data she thought she might
need which is Exhibit 1-4 and began to work on
her analysis.
Exhibit 3
Exhibit 3
Exhibit 4
NIKE’S SWOT ANALYSIS
 NIKE’S STRENGTHS
1) Number one sports brand in the world
2) Global brand
3) Strong at R&D and innovation
4) Strong sense of marketing campaign
5) No factories that tie up cash in buildings and
manufacturing
 NIKE’S STRENGTHS
6) It manufactures where ever it can produce the
highest quality products for the lowest price
7) Sponsored top athletes - gained valuable
coverage
8) Consumers feel NIKE is a “fashion brand”
 NIKE’S WEAKNESSES
1) Most of Nike profit margin comes from the
shoe sector/Low concern to other market
segment
2) The retail sector is very price sensitive
3) Questionable factory working conditions
 NIKE’S OPPORTUNITIES
1) Could develop sport wear, sunglasses, and
jewelry
2) Enter the mid-price segment
3) Push the apparel line
4) Growing sporting industry as health benefits
are being recognized
 NIKE’S THREATS
1) Nike is exposed to the international nature of
trade or International market competition
2) Competitive market for sports shoes and
garments
3) The declining market share in U.S
4) Consumer looking for the better deal
5) Competitors are developing alternative brands
to take away Nike’s market share
 STATEMENT OF PROBLEM

Should Kimi Ford buy Nike’s stock price right time

now or not?
 ALTERNATIVE SOLUTIONS
• Joanna Cohen WACC calculation
• WACC based on market value
JOANNA COHEN WACC CALCULATION
WACC FORMULA
 WACC = (WE x KE) + (WD x KD)
 Description:
 WE: Weighted Equity
 WD: Weighted Debt
 KD: Cost of Debt after Tax
 KE : Equity
 WEIGHT OF DEBT & EQUITY
 Joanna used the latest available balance sheet
 Capital sources: Book Values:
 Debt:
 Current portion of long-term debt $ 5.4
 Notes payable 855.3
 Long-term debt 435.9
 Total debt (Wd) 1296.6 27%

 Equity (We) 3494.5 73%

 COST OF DEBT
• Total interest 2001 $ 58.7
• Debt bal. 2000 $1444.6
• Debt bal. 2001 1296.6
• Average 1370.6
• Cost of Debt 4.3%
• Tax 38%
• Cost of Debt after Tax (Kd) 2.7%
 COST OF EQUITY
• Capital Asset Pricing Model (CAPM)

• RF 20-year treasury bond = 5.74%

• Risk Premium (RP) geometric = 5.90%
• β average= 0.80
• KE = RF + (β x RP)
• KE = 5.74% + (0.80 x 5.90%)
• KE = 10.5%
 WACC FORMULA
• WACC = (Wd x Kd) + (We x Ke)
• WACC = (27% x 2.7%) + (73% x 10.5%)
• WACC = 8.4%
• Equity value per share = $69.32
• Current Nike’s stock price = $42.09
• Undervalued by = $27.23
• By. Cohen
WACC BASED ON MARKET VALUE
WACC FORMULA
 WACC = (WE x KE) + (WD x KD)
 Description:
 WE: Weighted Equity
 WD: Weighted Debt
 KD: Cost of Debt after Tax
 KE : Equity
 WEIGHT OF DEBT & EQUITY
MV of Equity = Current Share Price x Current Shares
Outstanding
= $42.09 x 271.5 Million
= $11,427.44 Million

We = [11,427.44 / (11,427.44+1,296.6)]
= 89.8%

Wd = 1 - 89.8%
= 10.2%
 COST OF EQUITY
• Capital Asset Pricing Model (CAPM)

• RF 20-year treasury bond = 5.74%

• Risk Premium (RP) geometric= 5.90%
• β year-to-date = 0.69
• KE = RF + (β x RP)
• KE = 5.74% + (0.69 x 5.90%)
• KE = 9.81%
 COST OF DEBT
• Based on:
• Current Yield to Maturity of the Nike’s bond to
represent Nike’s current cost of debt:
• PV= 95.60
• n=40
• FV=100
• I = 3.375 % (Semiannual) 6.75% (Annual)
 COST OF DEBT
• Bond issued in 07/15/96, its maturity is
07/15/21 => 25-year bond (or the bond was
issued 5 years ago, because now is year 2001). As
result, we have n=2×(25-5)=40 (paid
semiannually)
r
1−(1+2)−40 100
• 95.6=3.375 + r
r/2 (1+ )40
2
• → r= 7.16%
• → Cost of debt (after tax) is: 7.16%(1-38%)
= 4.44%
 WACC FORMULA
• WACC = (Wd x Kd) + (We x Ke)
• WACC = (10.2% x 4.44%) + (89.8% x 9.81%)
• WACC = 9.26%
• Equity value per share = $58.24
• Current Nike’s stock price = $42.09
• Undervalued by = $16.15
Sensitivity of equity value to discount
rate:
 CONCLUSION
• discounting cash flows in Exhibit 2 with the
calculated WACC is 9.26%, the equity value of Nike
is $58.24 much higher than Nike’s current market
price of $42.09.

• These calculations clearly shows that the current

stock of Nike is undervalued and is discounted rate
of 11.17%
• The recommendation is to invest in the Nike or Buy
the stock, as the stock is undervalued for the
calculated cost of capital, WACC=9.26%