nike cost of capital

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NIKE, INC.: COST OF CAPITAL
On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts’ write-ups of Nike, Inc., the athletic-shoe manufacturer.
Nike’s share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald’s, 3M, and other large-cap, generally old-economy stocks. While the stock market had declined over the last 18 months, the
NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return
…show more content…
However, she had done a quick sensitivity analysis that revealed Nike was undervalued at discount rates below 11.17%. Because she was about to go into a meeting, she asked her new assistant, Joanna Cohen, to estimate Nike’s cost of capital.
Cohen immediately gathered all the data she thought she might need (Exhibits 1 through
4) and began to work on her analysis. At the end of the day, Cohen submitted her cost-of-capital estimate and a memo (Exhibit 5) explaining her assumptions to Ford.

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UVA-F-1353

-3Exhibit 1
NIKE, INC.: COST OF CAPITAL
Consolidated Income Statements
Year Ended May 31
1995
(in millions of dollars except per-share data)

1996

1997

1998

1999

2000

2001

Revenues
Cost of goods sold
Gross profit
Selling and administrative
Operating income
Interest expense
Other expense, net
Restructuring charge, net
Income before income taxes
Income taxes
Net income

$ 4,760.8 $ 6,470.6
2,865.3
3,906.7
1,895.6
2,563.9
1,209.8
1,588.6
685.8
975.3
24.2
39.5
11.7
36.7
649.9
899.1
250.2
345.9
$ 399.7 $ 553.2

$ 9,186.5 $ 9,553.1 $ 8,776.9 $ 8,995.1 $ 9,488.8
5,503.0
6,065.5
5,493.5
5,403.8
5,784.9
3,683.5
3,487.6
3,283.4
3,591.3
3,703.9
2,303.7
2,623.8

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