Nike Cost Of Capital Case Summary

The cost equity was determined using the CAPM approach. Looking at the last 78 years, the historical S&P market returns would suggest using a 10.5% to 11.0% rate to project future returns. The average industry revenue growth rate in footwear is 10%. However, to be more conservative, a market return rate of 8% was used. The risk free rate was determined to be 4.69% using the 10 year US Treasury Bills yield given in the case footnotes on page 7 of the case. This results in a market risk premium of 3.31%. The cost of equity was determined to be 12.80% (Risk free rate + Beta x Market Risk Premium) (See Exhibit 1).

Investing in a company has certainly changed over the years. Financial information is literally at one's fingertips via the internet. In today's fast paced corporate environment companies are under tremendous scrutiny to maintain their edge. The company I am evaluating is NIKE. This Financial analysis will consist of the following: Ratios from the Income Statement, Statement of Owner's Equity, and Balance Sheet. This information is designed to assist a potential investor.

In part one; we disagreed with Cohen where he decided to value the company as a whole instead of valuing each division separately. Since Nike is a multidivisional firm Cohen should of aggregated the values of the individual divisions and calculate a different cost of capital for each one. Since the exhibit 1

Cost of debt was calculated by finding the yield to maturity on 20-year Nike Inc. debt with a 6.75% coupon semi-annually. I assumed Nike Inc. to have a single cost of capital since its multiple business segments (shoes, apparel, sports equipment, etc.) are not very different and would experience similar risks and betas.

1. Cohen calculated Nike’s weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement:

clear assessment of the financial health of the company: NIKE International. Just knowing that this company chose a symbol that references the winged goddess of victory seems to have been a premonition for the designer of the ‘swoosh’ as well as the founder, Phil Knight, of NIKE. (Hinker,)

The report focuses on the Economic Value Added of Nike Inc. The analysis is conducted through a detailed assessment of the financial statements including income statement, balance sheet, and cash flow. Such financial statements are then applied to derive common-size statements for income statement and balance. The trends and predictions obtained from the common-size statements predict the future economic value. Similarly, the Pro-forma financial statements derived provide vital future economic performances of Nike Inc. According to the regression analysis and the assessment of the common-size and Pro-forma financial statements; Nike Inc. has a growth in revenue and earnings per share. The EVA computed using WACC, Net Operating Profit after Taxes (NOPAT), and Invested Capital is positive (+$391.24); this shows that Nike Inc. is financially stable and will grow in the next three years.

While calculating the Nike’s cost of capital using both the book value (Exhibit 1.1) and the market value (Exhibit 1.2), I could notice the mistake Cohen made finding the equity value. Cohen used the book value to reflect equity value. Although the book value is an accepted measure to estimate the debt value, the equity’s book value is an inaccurate measure of the value perceived by the shareholders. Since Nike is a publicly traded company, market value is the better method in reflecting Nike’s equity value.

The cost to the retailer is approximately 35.50$ which includes in the Research and development ($0.25), promotion/advertising ($4.00), Sales/distribution/admin ($5.00) and Nike’s operating profit ($6.23). While the cost of the user is $70.00 which holds in it the Retailer’s rent ($9.00), personnel ($9.50), other ($7.00) and Retailer’s operating profit ($9.00) (Break Down of Nike’s cost, 1995). In the first quarter of 2015, the revenues for Nike increased 15% from 7.4$ to $8.0billion. Gross margin elevated 46.6%. The increase was due to higher margin products and higher average prices. Selling/administrative expense exceeded 21% , reaching to $2.5 billion. Operating expense increased 19% to $1.6 billion and the net income increased 23% to $962 million (Leonard, 2015). Nike’s Inventories were $4.0 billion, short-term investments and cash were $1.0 billion, $4.6 billion, which was lower compared to the last year. (Nike News,

Her forecast showed that, at a discount rate of 12%, Nike was overvalued at its current share price of $42.09 (Exhibit 2). However, she had done a quick sensitivity analysis that revealed Nike was undervalued at discount rates below 11.17%. Because she was

is not this kind of companies. If we want to use the data of dividends, we need to consider the growth rate and future potential changes of dividend. In a word, we don’t think DDM is fit for Nike’s case.

Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market.

Enderle, K., Hirsch, D., Micka, L., Saving, B., Shah, S., Szerwinski, T. (2000, March 14). Strategic Analysis of Nike, Inc. Retrieved on December 14, 2005, from

We use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. As

Expanding globally is a very serious decision for any corporation. Before making this decision, management should take into consideration the health of the corporation and identify the long term financial goals. In this assignment, I will discuss the importance for the financial managers of Nike Inc. to use economic variables in identifying long term financial goals and the major techniques/tools that the financial managers of Nike Inc. can use for forecasting future directions in the stock market and in the economy as a whole.