Nike Wacc
Problem or issue:
• We are trying to determine if the cost-of- capital estimate is accurate and that will help us to determine if we want to purchase a holding in Nike.
Background or historical perspective:
• In early 2001 Nike’s share price headed downwards prompting interest in the stock from different portfolio managers. A week earlier Nike had a meeting to reveal its fiscal year 2001 results and to discuss a strategy to revitalize the company. Nike’s revenues had stalled since 1997 at about 9 billion and net income as well as market share had fallen over that time period. Nike was looking for a way to increase performance and boost revenues which appeared promising to investors who wanted to purchase the stock cheaply and hoped for growth.
Analysis and discussion:
•The WACC I came up with was 8.91% which was fairly close to the estimate of 8.3% that Cohen gave. WACC is important because it takes into account the different weights of each part of the capital structure and allows you to see if investing in the company will be profitable. I do not agree with Cohen’s calculation because she did not discount the long term debt when it came to determining the market value of the debt for finding the WACC. That was the only part of Cohen’s calculations that I did not agree with and when I adjusted for the discounted long term debt it only gave me about a .6% difference in WACC.
•The cost of equity using CAPM was 10.46%. CAPM is useful because it only takes into account systematic risk which is good because most portfolios already diversify away an unsystematic risk. One downside is that it can be very difficult to come up with a good Beta estimate for a project. With the DDM I came up with 6.7%. DDM can give you good estimates with of future dividend streams however the inputs are very sensitive