Case Analysis of Nike, Inc.: Cost of Capital
Apparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) because her assumptions such as Revenue Growth Rate, COGS / Sales, S &A / Sales, Current Assets / Sales, and Current Liability / Sales have been adopted from previous income statements and balance sheets from 1995 to 2001. Perhaps, we can take new assumptions. Generally, the case issue is to examine if the share price of Nike is undervalue or overvalue and the common
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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. Before-Tax Cost of Debt I used three (3) methods as follows: -Method (1): Using Cost Quotations Based on Coupon Interest Rate and Yield to Maturity (YTM) Cost of Debt = 14.14% -Method (2): Based on calculating the IRR Cost of Debt = 14.15% -Method (3): Approximating the Cost Based on the Value Bond and Coupon Rate Cost of Debt = 14% All of the calculations have been included in my spreadsheet. As we can see, all three methods present us approximately the same amount of the cost of debt. I have chosen 14.15% for the cost of debt. It is important to find the relationship between the required return and the coupon interest rate. When the required return is greater than the coupon interest rate, the bond value will be less than its par value. We choose cost of debt as 14.15% because it is rational (coupon value annually is 13.50%). When current value of bond is less than par, required return will be more than coupon rate. Weight Average of Cost of Debt: As I mentioned, there are two types of debt and consequently we have two types of Cost of Debt. I calculated the weight average for Cost of debt as follows: Total debt type 1 = $5.40 + $855.30 + 0.3 = $861 Total debt type 2 =

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