FACTS OF CASE

NIKE, Inc.: Cost of Capital

• North Point Large- Cap Fund manager Kimi Ford considering whether to buy Nike’s stock.

• Nike has experienced decline in sales growth, profits and market share.

• Nike has revealed that it would increase exposure in mid price footwear and apparel lines. It
also commits to cut down expenses.

• The market responded mixed signals to Nike’s changes. Kimi ford has done a cashflow
estimation, and asked her assistant, Joanna Cohen to estimate the firms cost of capital.
Single Cost of Capital

It is sufficient to use the single cost instead of multiple costs of capital

to compute WACC to be able to value the cash flows of the firm.
Additionally, Nike Inc.’s business segments relatively have the same risk.
Thus, based on our assumption, a single cost of capital is more
appropriate
CAPITAL STRUCTURE

New debt = Current portion of long term debt + notes payable + long term debt
= 5.40+855.30+435.90
=1296.60

New equity = Current shares outstanding x current share price

= 271.50 x 42.09
= 11,427.44
COST OF DEBT

COST OF DEBT
Kd= Yield(1-T)
=7.16%(1-38%)
=4.44%
COST OF EQUITY
• Ke = Rf + Beta(Rm-Rf)
= 5.39% + 0.69(7.5%)
= 10.57%
 Weighted Average Cost of Capital
(WACC)
Conclusion

• Kimi Ford should recommend to the NorthPoint Group Board that

acquiring Nike Inc. shares is a SOUND INVESTMENT. To discount cash
flows in Exhibit 2 with the calculated WACC of 9.95 percent, the
present value of Nike is $65.71 per share, which is more than its
current market price of $42.09. I believe that this value is still
understated because the current growth rate used—6 to 7 percent is
much lower than that estimated by Ford—8 to 10 percent. To
conclude, since the data shows that Nike Inc.’s common stock is
undervalued NorthPoint Group should add Nike Inc. to its Large Cap
Fund.