Nike Case Solution Essay

1277 Words Dec 3rd, 2011 6 Pages
Topic: Nike Inc.: Cost of Capital Course: International Finance

Table of Contents 1 Background Information on the Case: 3 1.1 Nike’s Performance: 3 1.2 Nike Analysts Meeting June 28, 2001: 3 2 Kimi Ford’s Evaluation of Nike: 3 3 Joanna Cohen’s Calculation of Nike’s Cost of Capital: 3 3.1 Assumptions & Calculations: 3 4 Our Calculation: 4 4.1 Cost of common equity 4 4.2 Cost of debt 4 4.3 Weights of Debt and Equity 4 4.4 WACC 5 4.5 Equity Value of Share 5 5 Conclusion: 6

Background Information on the Case:
Kimi Ford is a portfolio manager for the mutual-fund management firm NorthPoint Group. She is considering buying some shares for a fund she is managing, the NorthPoint Large-Cap Fund
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Our Calculation:
We calculated the cost of capital using the Weighted Average Cost of Capital Method. Below are our calculations and assumptions.
Cost of common equity
CAPM =5.74 + (5.90) x 0.8 =10.46%
We agree that CAPM is the most widely used method for estimating the cost of common equity. We used only the CAPM for calculating the cost of common equity as Joanna Cohen did. We decided against using an average of CAPM, Gordon’s dividend growth and Bond-Yield plus risk premium, as we don’t have a reliable risk premium to calculate the Bond-yield plus risk premium.
Cost of debt
YTM =7.16
Unlike Joanna, we calculated the cost of debt as the Yield to maturity of Nike’s bond.
Weights of Debt and Equity
The weights of debt and equity were calculated as per below table:

Capital Sources | | | | Values (in millions) | | | | | | | | | | | | | Debt | | | | | | | | | | | Current portion of long-term debt | | $ | 5.4 | | | | | Notes payable | | | | 855.3 | | | | | Long-term debt | | | | 416.72 | | | | | | | | $ | 1,277.42 | → | 10.05% of total capital | | Equity | | | | $ | 11,427.44 | → | 89.95% of total capital |

* Weight of Equity
Equity = number of shares * market value of share = 271.5 million * $42.09 = $11,427.44 million
Although the cost of equity can be calculated on book or market value, we feel that calculating

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