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Case 4 : Nike, Inc. Cost of Capital. Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya Wicaksono, ST Andi Onggo Widjono - Arifin Joyodiguno.

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Presentation on theme: "Case 4 : Nike, Inc. Cost of Capital. Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya Wicaksono, ST Andi Onggo Widjono - Arifin Joyodiguno."— Presentation transcript:

1 Case 4 : Nike, Inc. Cost of Capital

2 Presented By: Ishak Sijabat - Nike Astria Malik - Idham Widya Wicaksono, ST Andi Onggo Widjono - Arifin Joyodiguno - Johanes Tono Prihartono M. Saefurahman - Surya Adinata Purba Case 4 : Nike, Inc. : Cost of Capital EXECUTIVE B – 26B : GROUP III 2

3 AGENDA CASE SUMMARY PROBLEM IDENTIFICATION ALTERNATIVE SOLUTIONS RECOMMENDATION 3

4 A mutual-fund management firm It invests money mostly in Fortune 500 companies Its top holdings include Exxon mobile, General Motors, McDonald, 3M and other large-cap The stock market declined over the last 18 months NorthPoint large-cap Fund performed extremely well In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1% At the end of June 2001, the fund’s year-to-date returns stood at 6.4% versus -7.3% for S&P 500 CASE SUMMARY 4

5 The athletic-shoe manufacture Since 1997, its revenues had plateaued at around $9 billion Net income had fallen from almost $800 million to $580 million Market share in U.S athletic shoes had fallen from 48%, in 1997, to 42% in 2000 Adverse effect of a strong dollar had negatively affected revenue CASE SUMMARY 5

6 The management in concerned about the top-line growth and operating performance To boost revenue, the company would develop more athletic-shoe products in the mid-priced segment- a segment that Nike had overlooked in the recent years The company has also planned to push its apparel line The company has planned to exert more effort on expense control Long term revenue growth target is 8-10% Earning growth target is 15% CASE SUMMARY 6

7 PROBLEM IDENTIFICATION Kimi Ford is a portfolio manager for NorthPoint Large-Cap Fund Ford is concerned whether or not, It’s worth investing in Nike Analysts provided confronting evidence ; Lehman Brothers recommended to invest UBS Warburg / CSFB recommended not to invest 7

8 PROBLEM IDENTIFICATION If Nike’s discount rate is 12%, it’s stock price is overvalued If discount rate is < 11.17%, it’s stock price is undervalued Ford needs to calculate the cost of capital to determine whether the investment in Nike should be made or ignored 8

9 ALTERNATIVE SOLUTIONS Cohen calculated a weighted average cost of capital (WACC) of 8.4 percent by using the capital asset pricing model (CAPM), but we do not agree with Cohen’s figure and the reason to that are as follows : Value of Equity : Value of Debt : Weighting : Wd = 10.13% We = 89,87% 9

10 ALTERNATIVE SOLUTIONS Cost of Debt and Equity Risk Free rate : 10 year yield on US Treasuries 5.39% Market risk premium : Geometric mean 5.9% Beta (Average) : 0.8 Cost of Debt : 7.17% Cost of Equity : Rrf = 10,11 % WACC = w d r d (1 – T) + w ps r ps + w s r s = 9.5% 10

11 RECOMMENDATION 11

12 RECOMMENDATION As per the calculations done and the table given the stock price at WACC = 9.5% or we can say close to BUY so the stock price should be $ 55.68, which is higher than current stock price $ These calculation clearly shows that the current stock of Nike undervalued and is discounted rate of The recommendation is to invest in the Nike, as the stock is undervalued for the calculated cost of capital, WACC = 9.5% 12

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