Nike Cost of Capital

In: Business and Management

Submitted By JoeN2012
Words 1146
Pages 5
Case Study: Nike, Inc.: Cost of Capital

Written By:
Joe Nau
Section: 32347

Cost of Capital
NorthPoint Group’s strategy consists of identifying and investing in undervalued public companies. Joanna Cohen, an assistant to a portfolio manager at NorthPoint, is asked to help evaluate whether Nike Inc. is undervalued. Analysis by the portfolio manager shows that when Nike’s cash flows are discounted at 12% their shares are overpriced, however, when discounted at rates below 11.17% the firm is undervalued. Cohen is tasked to further analyze Nike’s cost of capital to accurately estimate what rate their cash flows should be discounted back at.

Joanna Cohen’s WACC Calculations
Cohen decides to use a single cost of capital rather than multiple costs of capital. This is accurate as Nike operates primarily in the same business segments and each segment assumes similar risks. To find Nike’s Weighted Average Cost of Capital (WACC), she must first find the capital structure of the firm. Cohen incorrectly uses the book value of equity, rather than the market value. Additionally, she uses the book value of debt, however this is acceptable because the market values are not provided in the case. With Nike’s capital structure in hand, Cohen begins calculate the cost of capital for debt and equity. To calculate the cost of debt, Cohen uses historical interest expenses as a proxy, however this is not a forward looking estimation and using the materials provided a better estimation of cost of debt can be made by calculating the yield-to-maturity on Nike’s outstanding bonds. To calculate cost of equity Cohen uses the Capital Asset Pricing Model (CAPM), however incorrectly inputs an average beta instead of the most current beta. The most current beta should be used because it is most representative of the future beta of Nike. The other inputs used in…...

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