NIKE INC.

COST OF CAPITAL

GROUP 1: LOYOLA | OREDINA | UYGUANCO | VIDAL

 Point of View
Case Context

FLOW Problem Definition

Analysis
Decision
Operationalization
 KIMI FORD
NorthPoint Large-Cap
Fund Manager

Point of View
Case Context Problem Def’n Analysis Decision Operationalization
 Hold.
-UBS Warburg Strong
buy!
-Lehman Brothers
Hold.
-CSFB

Case Context
Point of View Problem Def’n Analysis Decision Operationalization
 n
p u tatio
com lysis
own ana
and
Hold.
-UBS
Warburg Strong
buy!
-Lehman
Hold. Brothers

-CSFB

Case Context
Point of View Problem Def’n Analysis Decision Operationalization
 Should the NorthPoint Group assume
a buy or a hold position in regards to
Nike’s stock, given its current status
and future potential?

Problem Def’n
Point of View Case Context Analysis Decision Operationalization
 framework
Redetermining the Discounting and
capital structure revaluation of cash
flows
Cost of equity - CAPM

Cost of debt - YTM of

publicly traded Nike debt Computing WACC

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 Joanna Cohen
analysis
● Capital sources
○ Book value instead of market value
○ long-term debt instead of net debt
● Cost to debt
○ YTM of Nike’s publicly traded debt
● Cost to equity
○ Average beta
● WACC: low valuation of company’s shares

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 1 Capital structure EQUITY (in millions)

Current Shares 27.1

DEBT (in millions) Outstanding

Current Portion of LT Debt 5.4 Current Share Price 42.09

Notes Payable 855.3 Total Equity 11,427.435

LT Debt 435.8

Total Debt 1296.5 Total Debt & Equity (in 12,419.935

millions)
Less: Cash (304)
Debt Ratio 8%
Net Debt 992.5
Equity Ratio 92%

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 2 Cost of Debt
(in millions except for *) SEMI ANNUAL ANNUAL

Par Value -100 -100

Coupon Rate 6.75% 6.75%

Investment Payments per Year* 2 1

Investment Payment -3.375 -6.75

Number of Years to Maturity* 20 20

Net Proceeds from Sale of Bond 95.6 95.6

Before-Tax Cost of Debt* 3.5837239479813% 7.1708603734129%

0.071674479

Tax Rate 38% 38%

After Tax Cost of Debt 4.4438% 4.4459%

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 3 Cost of Equity

Current Yields on US Treasury 5.74%

Nike Historic Betas 0.69
Historical Equity Risk Premiums 5.90%
Cost of Equity 9.81100%

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 4 Weighted Average Cost of Capital
Annual Semi Annual
Debt Ratio 7.9912% 7.9912%
Equity Ratio 92% 92%
After-Tax Cost of Debt 4.4459% 4.4438%
Cost of Equity 9.81% 9.81%
WACC 9.38% 9.38%

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 5 Discounted Cash Flows
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 5 6 7 8 9 10

Present CF 764.1 663.1 777.6 866.2 1014 1117.6 1275.2 1351.7 1483.7 1572.7

Terminal Value 25380.9634

Total Cash 764.1 663.1 777.6 866.2 1014 1117.6 1275.2 1351.7 1483.7 26953.66
Flows

WACC 9.3823%

Present Value 698.559 554.224 594.177 605.105 647.595 652.537 680.691 659.637 661.948 10993.819
Cash Flows

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 5 Discounted Cash Flows

DCF Valuation 16748.28996

Less: Outstanding Debt -1296.6
Equity Value 15451.68996
Current Shares Outstanding 271.5
Equity Value Per Share 56.9120189

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 5 Discounted Cash Flows
DCF Valuation 16748.28996
Less: Outstanding Debt -1296.6
Equity Value 15451.68996
Current Shares Outstanding 271.5
Equity Value Per Share 56.9120189
Current Share Price 42.09

Analysis
Point of View Case Context Problem Def’n Decision Operationalization
 BUY
With WACC value of 9.38%, Nike Inc. is
undervalued

Decision
Point of View Case Context Problem Def’n Analysis Operationalization
 ● Constant monitoring of stock charts
and news that affect Nike and its
industry
operations
● Above resistance line: long position
● Below support line: stop-loss price of
$37.88, 10% below current market price

● Sell if stock reaches a high value

● Discount rate falls below WACC value

of 9.3822%: reassess

Operationalization
Point of View Case Context Problem Def’n Analysis Decision
 END
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