Essay About Average Cost Of Capital And Case Calculations

Nike Inc Case Study
Nike Inc. Case AnalysisAndrew Goldstein, Hernica HypoliteAdvanced Issues in Corporate FinanceFINC-4753-201Dr. Forrester March 7, 2016        AbstractThe weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Nike, like every other business requires capital to develop new products, expand market share, update technology etc. To do this they must have an expected rate of return that is greater than the cost of capital. The weighted average cost of capital is an appropriate way to determine what the cost of capital is. To do this we looked at the weights of debt and equity, and the cost of debt and equity for Nike. According to the case calculations, if the WACC is less than 11.17%, then Nike is undervalued and Kimi Ford and the NorthPoint group should invest in the company. If it is higher than the 11.17%, then Nike is overvalued, and would not be a good investment. Case Introduction        In July 2001, Kimi Ford, a portfolio manager at NorthPoint group pored over analysis write-ups of Nike Inc. Ford wanted to increase the investment of her mutual fund management firm, and as such was considering buying some of Nike’s shares. However a week earlier in June, Nike held a meeting to discuss its 2001 fiscal year performance, and to communicate a strategy to revitalize the company. Nike’s management revealed that it had been experiencing declines in revenues and net profit. Additionally, Nike’s market share also took a hit, falling 48% in 1997 and 42% in 2000. Management communicated plans to increase top line growth and reduce operating expense. In the end the company executives expounded on their long term revenue growth target of 8% to 20%, and earnings growth targets to 15%. Some financial analyst thought the targets were too aggressive while others saw it as opportunities for growth within the company.    While the meeting and analyst reports gave Kimi no clear guidance, she decided to develop her own discounted cash flow forecast for Nike in order to come to a more accurate conclusion. In order to recommend a position on Nike, Kimi needed to understand what Nike’s cost of capital is and complete a discounted cash flow analysis. Joanna Cohen, Kimi’s new assistant, has compiled a weighted average cost of capital estimate for Joanna.   Analysis        In order to determine if Nike’s stock price was over or under valued, it was important to accurately calculate the WACC for the company. Any slight errors in the numbers could lead to a wrong recommendation, which could turn out to be extremely costly for the NorthPoint Group. We reviewed Joanna Cohen’s calculations and saw a few errors that needed to be corrected in order to come up with an accurate WACC for Nike. Below is the formula we used to calculate the WACC.