Nike Inc.
Nike Inc.,
Cost of Capital
Dr. Romer
Finance 3613
By:
Joseph White
Michael Parker
NorthPoint a mutual-fund-management firm is contemplating adding Nike Inc. stocks to its Large-Cap Fund. Kimi Ford a portfolio manager for NorthPoint has developed a discounted-cash-flow forecast to help make the decision. Kimi comes to the conclusion that Nike is overvalued at its current price of $42.09 with a 12 percent cost of capital that she estimated. To determine if her estimation is correct about whether Nike was undervalued or overvalued Kimi has asked her assistant Joanna Cohen to estimate a cost of capital for Nike. Kimi has determined that if Nike’s cost of capital is under 11.2 percent Nike would be undervalued at its current price of $42.09. Joanna breaks her estimation down into four different segments when calculating the WACC (Weighted Average Cost of Capital); Single Cost of Multiple Cost, Cost of Debt, Cost of Equity, and Weights of Capital.
In Joanna’s estimate she chooses to use a single cost of capital. Her reasoning behind this decision lies in the risk associated with the different business segments of Nike. We agree with her assessment that a single cost of capital is most appropriate with Nike. It should also be noted that the major use of WACC is to assist in this estimation of overall cash flows for Nike and using more than one cost of capital could cause an undervaluation or overvaluation of Nike.
The next area of concern involves Joanna’s calculation of cost of debt. She uses past historical information to come up with what she believes is an accurate cost of debt. However, we believe this is incorrect because the WACC is used to estimate future cash flows and relies on the current cost of debt or the cost of debt investors can expect to receive in the future. In this situation information is available to find the current yield on publicly traded Nike debt (bonds). * Coupon 6.75% Semi-annually * Issued 07/15/1996 * Maturity
Cost of Capital
Dr. Romer
Finance 3613
By:
Joseph White
Michael Parker
NorthPoint a mutual-fund-management firm is contemplating adding Nike Inc. stocks to its Large-Cap Fund. Kimi Ford a portfolio manager for NorthPoint has developed a discounted-cash-flow forecast to help make the decision. Kimi comes to the conclusion that Nike is overvalued at its current price of $42.09 with a 12 percent cost of capital that she estimated. To determine if her estimation is correct about whether Nike was undervalued or overvalued Kimi has asked her assistant Joanna Cohen to estimate a cost of capital for Nike. Kimi has determined that if Nike’s cost of capital is under 11.2 percent Nike would be undervalued at its current price of $42.09. Joanna breaks her estimation down into four different segments when calculating the WACC (Weighted Average Cost of Capital); Single Cost of Multiple Cost, Cost of Debt, Cost of Equity, and Weights of Capital.
In Joanna’s estimate she chooses to use a single cost of capital. Her reasoning behind this decision lies in the risk associated with the different business segments of Nike. We agree with her assessment that a single cost of capital is most appropriate with Nike. It should also be noted that the major use of WACC is to assist in this estimation of overall cash flows for Nike and using more than one cost of capital could cause an undervaluation or overvaluation of Nike.
The next area of concern involves Joanna’s calculation of cost of debt. She uses past historical information to come up with what she believes is an accurate cost of debt. However, we believe this is incorrect because the WACC is used to estimate future cash flows and relies on the current cost of debt or the cost of debt investors can expect to receive in the future. In this situation information is available to find the current yield on publicly traded Nike debt (bonds). * Coupon 6.75% Semi-annually * Issued 07/15/1996 * Maturity