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Nike Cost of Capital, SWOT Analysis
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  • 1. 1
    CASE 14: Nike, Inc.: Cost of CapitalPresented By:Divya Mishra
  • 2.
    • Case Background
    • 3. Problem Identification
    • 4. SWOT Analysis
    • 5. Data Analysis
    • 6. Recommendation
    • 7. Questions
    2
    AGENDA
  • 8. BACKGROUND OF NORTHPOINT GROUP
    • A mutual-fund management firm
    • 9. It invests money mostly in Fortune 500 companies
    • 10. Its top holdings include Exxon mobile, General Motors, McDonald, 3M and other large-cap
    • 11. The stock market declined over the last 18 months
    • 12. NorthPoint large-cap Fund performed extremely well
    • 13. In 2000, the fund earned a return of 20.7% , even as the S&P 500 fell 10.1%
    • 14. At the end of June 2001, the fund’s year- to-date returns stood at 6.4% versus -7.3% for the S&P 500
    3
  • 15.
    • The athletic-shoe manufacturer
    • 16. Since 1997, its revenues had plateaued at around $9 billion
    • 17. Net income had fallen from almost $800 million to $580 million
    • 18. Market share in U.S. athletic shoes had fallen from 48%, in 1997,to 42% in 2000
    • 19. Adverse effect of a strong dollar had negatively affected revenue
    BACKGROUND OF Nike, Inc.
    4
    BACKGROUND OF Nike Inc.
  • 20.
    • The management is concerned about the top-line growth and operating performance
    • 21. To boost revenue, the company would develop more athletic-shoe products in the mid-priced segment- a segment that Nike had overlooked in the recent years
    • 22. The company has also planned to push its apparel line
    • 23. The company has planned to exert more effort on the expense control
    • 24. Long term revenue growth target is 8%-10%
    • 25. Earning growth target is 15%
    BACKGROUND OF Nike, Inc.
    5
    BACKGROUND OF Nike Inc.
  • 26.
    • Kimi Ford is a portfolio manager for NorthPoint Large-Cap Fund.
    • 27. Ford is concerned whether or not, it’s worth investing in Nike.
    • 28. Analysts provided confronting evidence.
    • 29. Lehman Brothers recommended to invest.
    • 30. UBS Warburg/CSFB recommended not to invest.
    PROBLEM IDENTIFICATION
    6
  • 31.
    • If Nike’s discount rate is 12%, its stock price is overvalued
    • 32. If discount rate is < 11.17%, its stock price is undervalued
    • 33. Ford needs to calculate the cost of capital to determine whether the investment in Nike should be made or ignored
    PROBLEM IDENTIFICATION
    7
    PROBLEM IDENTIFICATION
  • 34. SWOT ANALYSIS
    Strengths
    • Number one sports brand in the world
    • 35. Global Brand
    • 36. Strong at R&D and innovation
    • 37. Strong sense of marketing campaign
    • 38. No factories that tie up cash in buildings and manufacturing
    • 39. It manufactures where ever it can produce the highest quality products for the lowest price
    8
  • 40. Weaknesses
    • Most of Nike profit margin comes from the shoe sector
    • 41. The retail sector is very price sensitive
    • 42. Nike was for quite some time unwilling to disclose any type of information concerning its partnering companies
    • 43. Questionable factory working conditions
    SWOT ANALYSIS
    9
    SWOT ANALYSIS
  • 44. Opportunities
    • Owners truly believe that Nike is NOT a “Fashion Brand” but some consumers feel different
    • 45. Could develop sport wear, sunglasses, and jewelry
    • 46. Reduce prices in Asian and third world countries to increase market share
    • 47. Make efforts to reduce the pollution generated from the Nike manufacturing factors.
    • 48. Utilization of shoe production waste.
    SWOT ANALYSIS
    10
    SWOT ANALYSIS
  • 49. Threats
    • Nike is exposed to the international nature of trade
    • 50. Competitive market for sports shoes and garments
    • 51. The declining market share in U.S.
    • 52. Consumer looking for the better deal
    • 53. The organization has experienced many adverse publicity feedbacks due to its widespread advertising
    SWOT ANALYSIS
    11
    SWOT ANALYSIS
  • 54. Cohen calculated a weighted average cost of capital(WACC) of 8.3 percent by using the capital asset pricing model(CAPM), but we do not agree with Cohen’s figure and the reason to that are as follows:
    1.Value of equity
    E=Stock Price*Number of Shares=42.09*271.5=$11427.44
    (Cohen:$3494.5)
    2.Value of Debt
    D= Current LT + Notes Payable + LT Debt(discounted)=5.4+855.3+416.72=$1277.42
    DATA ANALYSIS
    12
    DATA ANALYSIS
  • 55. 3. Weighting
    • WD=D/D+E=1277/12704.86=10.05%
    • 56. WE=E/D+E=11427.44/12704.86=89.95%
    4.Cost of Debt and Equity
    Risk Free rate=20-year yield on U.S Treasuries=5.74%
    Market risk premium=Geometric mean=5.9%
    β (historical data) =0.8
    Cost of Debt=YTM on 20 year Nike Inc. Bond=7.17%
    Cost of Equity=rE= rF + (rM – rF)β=10.46%
    DATA ANALYSIS
    13
    DATA ANALYSIS
  • 57.
    • WACC=Wd*Rd(1-T)+WeRe=10.05%*7.17%(1-38%)+89.95%*10.46%=9.86%
    Why we get rid of the other two methods:
    • Dividend Discount Model-no substantial dividend
    • 58. Earning capitalization model-Ignore the growth of company
    • 59. Data analysis Excel.xlsx
    DATA ANALYSIS
    14
    DATA ANALYSIS
  • 60.
    • Net Margin = Net profit/Sales
    15
    DATA ANALYSIS
  • 61.
    • The graph shows a trend in the net profit margin i.e. the percentage of profit after operating expenses. The net profit margin is recovering from a low of 4% in 1998 to 6% in 2001 and has been consistent with the Gross profit margin, a sign that even the expenses management is improving as well hence, profitability of Nike is set to improve.
    • 62. The gross margin and operation margin show the same trend.
    16
    KEY FINANCIAL DATA
  • 63. RECOMMENDATION
  • 64.
    • As per the calculations done in the excel sheet and the table given the stock price at WACC =9.86% or we can say close to 10% so the stock price should be greater than $50.92 , which is higher than current stock price $42.09.
    • 65. These calculations clearly shows that the current stock of Nike is undervalued and is discounted rate of 11.17%.
    • 66. The recommendation is to invest in the Nike, as the stock is undervalued for the calculated cost of capital, WACC=9.86%.
    RECOMMENDATION
    RECOMMENDATION
  • 67. QUESTIONS
    19
    QUESTIONS
  • 68. THANKYOU
    20