NIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio supervisor at NorthPoint Group, a mutual-fund administration agency, pored over analystsR write-ups of Nike, Inc., the athletic-shoe producer. NikeRs share value had declined considerably from the start of the 12 months. Ford was contemplating shopping for some shares for the fund she managed, the NorthPoint Giant-Cap Fund, which invested principally in Fortune 500 firms, with an emphasis on worth investing. Its prime holdings included ExxonMobil, Common Motors, McDonaldRs, 3M, and different large-cap, typically old-economy shares. Whereas the inventory market had declined during the last 18 months, the NorthPoint Giant-Cap Fund had carried out extraordinarily properly. In 2000, the fund earned a return of 20.7%, even because the S&P 500 fell 10.1%. On the finish of June 2001, the fundRs year-to-date returns stood at 6.four% versus Ã7.three% for the S&P 500. Solely per week earlier, on June 28, 2001, Nike had held an analystsR assembly to reveal its fiscal-year 2001 outcomes.1 The assembly, nonetheless, had one other objective: Nike administration wished to speak a method for revitalizing the corporate. Since 1997, its revenues had plateaued at round $9 billion, whereas internet revenue had fallen from nearly $800 million to $580 million (see Exhibit 1). NikeRs market share in U.S. athletic sneakers had fallen from 48%, in 1997, to 42% in 2000.2 As well as, latest supply-chain points and the adversarial impact of a robust greenback had negatively affected income. On the assembly, administration revealed plans to deal with each top-line progress and working efficiency. To spice up income, the corporate would develop extra athletic-shoe merchandise within the midpriced segment3ea section that Nike had neglected in recent times. Nike additionally deliberate to push its attire line, which, beneath the latest management of trade veteran Mindy Grossman,four had carried out extraordinarily properly. On the associated fee facet, Nike would exert extra effort on expense management. Lastly, firm executives reiterated their long-term revenue-growth targets of eight% to 10% and earnings-growth targets of above 15%. AnalystsR reactions have been blended. Some thought the monetary targets have been too aggressive; others noticed vital progress alternatives in attire and in NikeRs worldwide companies. Kimi Ford learn all of the analystsR studies that she may discover in regards to the June 28 assembly, however the studies gave her no clear steering: a Lehman Brothers report really useful a robust purchase, whereas UBS Warburg and CSFB analysts expressed misgivings in regards to the firm and really useful a maintain. Ford determined as an alternative to develop her personal discounted money circulation forecast to come to a clearer conclusion. Her forecast confirmed that, at a reduction charge of 12%, Nike was overvalued at its present share value of $42.09 (Exhibit 2). Nonetheless, she had achieved a fast sensitivity evaluation that revealed Nike was undervalued at low cost charges under 11.17%. As a result of she was about to enter a gathering, she requested her new assistant, Joanna Cohen, to estimate NikeRs price of capital. Cohen instantly gathered all the information she thought she may want (Displays 1 by means of four) and started to work on her evaluation. On the finish of the day, Cohen submitted her cost-of-capital estimate and a memo (Exhibit 5) explaining her assumptions to Ford. 1. What’s the monetary well being of the agency? Analyze the historic steadiness sheet and the revenue assertion? Assess â the place relevant â CCC, SGR, FCF, Gross margin, Internet margin, and so forth
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