Pierre Cattoni Prof. R.

Ybaez
Michelle Maayo BA 280.2 THW
Kyon!"oo# Par# $% March 20$2
&o'iel Te'e"
Nike, Inc.: Cost of Capital
Case Facts
North Point Group
(orth Point )ro* i" a +tal fn, +ana!e+ent fir+. -ar!e.Ca* /n, i" one of the
*ortfolio" +ana!e, by Ki+i /or,. Thi" *ortfolio i" co+*o"e, of /ortne 000 co+*anie"1 to
incl,e 233on Mobil1 )M1 %M1 an, lar!e.ca*1 ol, econo+y "toc#". The fn, earne, 20.45
retrn in 2000 an, 6.75 year.to.,ate retrn"1 en, of &ne 200$. With e+*ha"i" on 'ale.
in'e"tin!1 Ki+i /or, i" con"i,erin! byin! "hare" of (i#e1 8nc.
Nike, Inc.
An athletic "hoe +anfactrer1 (i#e1 8nc. ha, a "ta!natin! re'ene of 9: billion fro+
$::4.200$. (et inco+e of the co+*any ha, al"o fallen fro+ 9800 to 9080 +illion. (i#e;" +ar#et
"hare in athletic "hoe" ha, ,ro**e, fro+ 785 <$::4= to 725 <2000=.
To a,,re"" the crrent *erfor+ance1 (i#e;" +ana!e+ent ha" the follo>in! *lan"?
@e'elo* +ore athletic "hoe *ro,ct" in +i,.*rice "e!+ent
P"h it" a**arel line
23ert +ore effort on co"t control
Tar!et"? Re'ene !ro>th? 85 to $05A 2arnin!" !ro>th? abo'e $05
Analysts Assessment of Nike, Inc.
Analy"t" ha'e +i3e, reaction" abot (i#e. Bo+e tho!ht that the co+*any ha" too
a!!re""i'e financial tar!et". Cther" "a> "i!nificant !ro>th in a**arel an, (i#e;" international
b"ine""e". The -eh+an Brother" *ro*o"e a DbyE >hile the FBB Warbr! an, C/BB "!!e"t
a Dhol,E.
Joanna Cohens Analysis
The a""i"tant *ortfolio +ana!er1 &oanna Cohen1 co+*te, a "in!le co"t of ca*ital for
(i#e1 8nc. "ince the co+*any i" in "*ort".relate, b"ine""1 e3ce*t for one.
Value of Debt and Euity
Capital Sources Values Amount (in
million !
"ei#hts ($!
%e&t Boo# Gale $12:6.6 24
'(uity Boo# Gale %17:7.0 4%
)otal 714:$.$ $00
&oanna Cohen "e, the boo# 'ale of both ,ebt an, eHity to co+*te for the 'ale of
the fir+ an, the >ei!ht" of ,ebt an, eHity.
!ost of Debt
The e"ti+ate, co"t of ,ebt of (i#e i" 7.%51 *re.ta3. Thi" i" co+*te, by ta#in! total
intere"t e3*en"e for 200$ ,i'i,e, by the co+*any;" a'era!e ,ebt balance <May 2000 an, May
200$=. F"in! %85 ta3 rate <"tattory ta3 *l" "tate ta3=1 the after ta3 co"t of ,ebt i" 2.45.
!ost of Euity
The e"ti+ate, co"t of eHity >a" $0.05. F"in! CAPM1 the follo>in! 'ale" >ere "e,?
ri"#.free rate? 20.year Trea"ry bon,"A ri"# *re+i+? co+*on, a'era!e *re+i+ of the +ar#et
o'er Trea"ry bon,"A beta? a'era!e of (i#e;" hi"toric beta fro+ $::6 to 200$.
F"in! the abo'e 'ale"1 the co+*te, WACC i" 8.75.
Nike, Inc. "hare price
With the ,i"conte, ca"h flo> foreca"t ,e'elo*e, by Ki+i /or,1 the *rice of (i#e1 "in!
WACCI8.751 i" 97:.0: *er "hare. Thi" +a#e" (i#e n,er'ale, at the crrent +ar#et *rice of
972.0:.
*ecommen+ation
The i""e of (i#e;" ca"e i" abot the calclation of the co"t of ca*ital <WACC= an, if the
"hare *rice of (i#e i" o'er'ale, or n,er'ale,. /inally1 it i" al"o a He"tion if (i#e1 8nc. "hol,
be a,,e, to the (orth Point )ro*;" +tal fn, *ortfolio or not.
Cost of Capital Calculation for Nike, Inc.
The co"t of ca*ital i" the +ini++ rate of retrn that a fir+ +"t earn on the *roJect" in
>hich it in'e"t".
Value of Debt (Vd)
&oanna Cohen "e, the boo# 'ale of ,ebt. 8n calclatin! 'ale of ,ebt1 it i" reco++en,e,
that the 'ale of lon! ter+ ,ebt that a**ear" on the balance "heet be ,i"conte,. 8t +ean" the
ftre 'ale of total lon! ter+ ,ebt ba"e on co*on rate "hol, be con"i,ere,.
To calclate total 'ale of ,ebt1 the "te*" are a" follo>"?
/ro+ $0 &ly 2000 ntil $0 &anary 200$ I 6.405 co*on *ai,. /ro+ $0 &anary 200$ ntil %$
May 200$ <7.0 +onth"= I 6.40 5 3 7.0 +onth"K6 +onth" I 0.065
#arket Value of Debt $Vd% !alculation&
G, I Crrent -T L (ote" Payable L -T @ebtMM <,i"conte,=
I 90.70 L 9800.%0 L 97$%.87
I 9$1247.07
''()*+., - $)*+., . +./01% 2 ()3*.4**
Value of Equity
The +ar#et 'ale of eHity "hol, be "e, in calclatin! the co"t of ca*ital.
#arket Value of Euity $Ve% !alculation&
Ge I Btoc# Price N (+ber of Bhare" Ct"tan,in!
I 972.0: N 24$.0
I 9$$1724.77
Weights of Debt and Equity
The >ei!ht" of ,ebt an, eHity "in! the +ar#et 'ale" are co+*te, a" follo>"?
W, I 9$1247.0% K <9$1247.0% L 9$$1724.77= I $0.0%5
We I 9$$1724.77 K <9$1247.0% L $$1724.77= I 8:.:45
Cost of Debt
The co"t of ,ebt >a" calclate, by fin,in! the yiel, to +atrity <YTM= on (i#e 8nc. ,ebt >ith
a 6.405 co*on "e+i.annally. F"in! 23cel1 the YTM i" co+*te, a" in 23hibit $. The *re.ta3
co"t of ,ebt of (i#e i" 4.$45. F"in! the effecti'e ta3 rate of %851 the after.ta3 co"t of ,ebt i"
7.775.
Cost of Equity
The CAPM a**roach i" "e, to co+*te the co"t of eHity. The follo>in! 'ale" are "e,?
ri"# free rate? the $0.year Trea"ry bon, rateA ri"# *re+i+? !eo+etric +ean of $:26.$:::
eHity ri"# *re+i+"A beta? a'era!e of (i#e hi"toric beta".
The $0.year yiel, on F.B. Trea"rie" >a" "e, a" the ri"# free rate beca"e it +ore
a**ro3i+ate" the +ar#et ,eter+ine, rate bein! a +ore acti'e +ar#et. Al"o1 the *roJection of
(i#e financial "tate+ent" i" $0.year *erio,. The $0.year rate al"o a**ro3i+ate" the ,ration of
the "toc# +ar#et in,e3 *ortfolio. The !eo+etric +ean >a" "e, for the ri"# *re+i+ beca"e it
i" not bia"e, by the +ea"re+ent *erio,1 nli#e the arith+etic +ean. The !eo+etric a'era!e1
bein! a "in!le e"ti+ate for the entire ti+e inter'al i" in'ariant to the choice of ti+e inter'al.
/inally1 for the beta1 >e "e, the a'era!e to accont for the lar!e flctation" in (i#e;" hi"torical
beta.
5ei6hted A7era6e !ost of !apital
F"in! the abo'e 'ale"1 the WACC i" co+*te, a" follo>"?
WACC I 7.775 3 $0.0%5 L $0.$$5 3 8:.:45 I :.075
Nikes Share Price
Ha'in! co+*te, the ne> WACC1 thi" rate >a" "e, to ,i"cont the free ca"h flo> of (i#e
for the $0.year *roJection. The calclate, 'ale of eHity >a" 9$%1 :46.42 <23hibit 2=. )i'en the
crrent ot"tan,in! "hare" of 24$.01 the "hare *rice of (i#e i" 'ale, at 90$.70. Co+*are, to
the crrent "hare *rice of (i#e at 972.0:1 the "hare i" n,er'ale,.
8t i" reco++en,e, that (i#e "hare" "hol, be a,,e, to the *ortfolio of (orth Point )ro*
beca"e of the follo>in! rea"on"?
Fn,er'ale,? *rice, belo> fair *rice
The 8RR or rate of retrn i" !reater than the co"t of ca*ital
(i#e ha" !ro>th *otential
Mana!e+ent *lan" are lai, for the co+*any
23hibit $
Co"t of @ebt
Bettle+ent @ate 4K0K200$
Matrity @ate 4K$0K202$
Rate 6.405
Crrent Price 9:0.60
/ace Gale 9$00
/reHency 2
Ba"i" 2
Ta3 rate %85
#, before ta3 4.$45
#, after ta3 7.775
Gale of @ebt G,
9
$1247.0%
Co"t of 2Hity
Ri"# /ree 0.%:5
Ri"# Pre+i+ 0.:05
Beta 0.80

#e $0.$$5
Gale of 2Hity Ge 9$$1724.77
23hibit 2