Nike Cost of Capital Case

November23,2016
Nike, Inc.: Cost of Capital
Prepared by
Justin Nychuk
BUS 495: Financial Analysis and Decisions
Darryl Yasinowski
University of Regina
Due November 23rd 2016

Table of Contents
Case Overview....................................................................................................................................1
Objective ...........................................................................................................................................1
Company Analysis...............................................................................................................................1
Strengths........................................................................................................................................1
Weakness.......................................................................................................................................1
Opportunities.................................................................................................................................2
Threats...........................................................................................................................................2
Industry Drivers..................................................................................................................................2
Current Macroeconomic Environment.................................................................................................3
Consumer Sentiment ......................................................................................................................3
Appendix 1—US Consumer Sentiment..........................................................................................4
Manufacturing PMI.........................................................................................................................4
Appendix 2—US Manufacturing PMI.............................................................................................5
Appendix 3—US Manufacturing PMI MAX....................................................................................5
Non-Manufacturing PMI..................................................................................................................5
Appendix 4—Non-Manufacturing PMI..........................................................................................6
Appendix 5—US Non-Manufacturing MAX....................................................................................6
Main Competitors...............................................................................................................................7
Adidas............................................................................................................................................7
Appendix 6—Adidas Stock Chart 8 Years.......................................................................................7
Under Armour................................................................................................................................8
Appendix7—Under Armour Stock (UA) MAX.................................................................................8
Industry Analysis ................................................................................................................................9
PEST Analysis......................................................................................................................................9
Political..........................................................................................................................................9
Economic.....................................................................................................................................10
Social ...........................................................................................................................................11
Technological ...............................................................................................................................11
Financial Analysis..............................................................................................................................11
WACC...........................................................................................................................................11
Cost of Debt.................................................................................................................................12

Cost of Equity...............................................................................................................................12
CAPM...........................................................................................................................................12
Appendix 8 —US Generic Gov’t 10 Year Yield..............................................................................13
Beta.............................................................................................................................................13
Market Risk Premium....................................................................................................................13
Appendix 9—Market Risk Premium............................................................................................14
Capital Structure...............................................................................................................................14
Appendix 10—Nike’s Capital Structure .......................................................................................15
Ratio Analysis...................................................................................................................................15
Liquidity Ratios.............................................................................................................................15
Activity Ratios...............................................................................................................................16
Financial Leverage ratios...............................................................................................................16
Profitability Ratios ........................................................................................................................16
Discounted Cash Flow.......................................................................................................................17
Appendix 11—DCF NIKE.............................................................................................................18
Credit Risk........................................................................................................................................19
Appendix 12—Risk Scale............................................................................................................20
Appendix 13—Nikes Credit Risk..................................................................................................20
Relative Valuation.............................................................................................................................20
Appendix 14—RV vs. Self 5 years................................................................................................21
Appendix 15—RV vs. Self 2 years................................................................................................21
Appendix 16—Nike vs. Peers Market Cap 1B+ 5 Year...................................................................22
Appendix 17—Nike vs. Peers Market Cap 1B+ 2 Year...................................................................23
Appendix 18-- RV vs.Peers YTD..................................................................................................23
Technical Analysis.............................................................................................................................24
Appendix 19—Nike Stock Chart..................................................................................................24
Appendix 20—Nike Stock Chart 2 years ......................................................................................24
Recommendation.............................................................................................................................25
Appendix—Ratio Charts.............................................................................................................27
References.......................................................................................................................................29

Executive Summary
This report has been generated to determine if Nike Inc. is a good investment and should be
added to NorthPoint Group’s large-cap investment fund. The evidence generated in the initial
reports had conflicting advice as to whether they should include Nike in their portfolio. Our
group has been asked to re-evaluate all of the financials as well as a holistic company overview
to determine how to advise Kimi Ford of NorthPoint Group to proceed.
Nike is the largest sports brand in the world with a market cap of $82.76B. They established in
1964 and since then they have worked hard to get where they are. With a focus on research and
development, they maintain their position as the most recognizable sports brand. In the face of
adversity regarding their outsourcing of manufacturing to questionably unethical facilities in
China in the 1990’s, Nike has overcome these obstacles and are doing their best to ensure that
they do business in a way that consumers and investors can agree with. Nike has an opportunity
to grow their business by focusing on the mid-range footwear and the apparel sectors, which
could increase their market share.
The current industry does have some uncertainty in how it can affect Nike Inc.’s share price.
With this unpredictability the decision whether to invest in Nike needs to be looked at closely.
They are a very strong company and hold a large portion of the market for sporting apparel.
Consumers are key to a company’s success and as such they can dictate whether Nike will
continue to grow or be stopped cold. With changes in technology and societal demands, a
company needs to stay connected or another company may swoop in and commandeer their
share of the market.
Based on a total analysis of Nike Inc., we recommend Kimi Ford and North Point Group go
forward with their purchase of Nike Inc. shares. They are currently undervalued based on the
numbers that we have processed. The market will eventually realise the true value of the shares
which means an increase in Kimi Ford’s portfol

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Case Overview
Kimi Ford is a Portfolio Manager at North Point Group, a mutual fund management firm. Her
fund in particular deals with large cap organizations and is invested, for the most part, in
fortune 500 companies. This fund has had fantastic performance over recent years and has
seen significant growth even in years of market decline. As manager of the Large Cap fund, Ford
has been looking at investing in Nike. She has went through many analysts’ write up of Nike Inc.
and found them to be Inconclusive as some analysts deemed the company a must buy and
others determined that Nike was a hold. Ford decided that she would have to do her own
analysis of Nike to make the picture clearer. She asked her new assistant Joanna Cohen to
calculate Nike’s cost of capital so Ford could know if the company was a buy or not.
Objective
Joanna has made some errors regarding the cost of capital that must be corrected. Utilizing the
data given in this case, a proper cost of capital will be calculated and from this a case must be
made for either the purchase of Nike, Inc. shares or to pass on them. To do this, not only does a
financial analysis need to be completed, but also an industry and company analysis.
Company Analysis
Strengths
Nike is the largest sports brand with a market cap of 82.76B, which allows them to operate with
much more power in their industry. They are a globally recognized company that sells to many
markets around the world with their main product being shoes. As a result of their large pool of
capital, equity and long-term debt, they can prioritize and invest a large amount into Research
in Development and innovation to improve their products and operations. Nike has been in the
sports apparel industry for many years and has developed a very successful advertising and
marketing strategy. They arguably have the most successful marketing campaigns in the
industry and this allows them to retain market share and outperform their peers. They are also
industry leaders in operating costs which allows them to have higher profit margins. Another
growth strategy they implement is further diversification in their product and industry—new
products, product lines, technology, and sports.
Weakness
One main weakness Nike has is that it operates in a cyclical industry meaning they will have
growing revenues in expansion years and lower revenues in recessions. With that said, they are

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correlated with the macro-economic environment. As a result, it is important to analyze
different economic metrics such as Manufacturing PMI, Non-Manufacturing PMI, and consumer
sentiment. The retail industry is also a very price sensitive industry due to the theory of supply
and demand. Therefore, currency fluctuations can have a large effect on retail companies. Nike
also has been criticized over the years for its working conditions in its factories as well as their
hiring of cheap foreign labour. However, this does allow them to cut costs and achieve their
operating ratios.
Opportunities
Nike is currently in their maturity as a company and sales will eventually peak in their
respective sector. As a result they need to prioritize market share, technological improvement,
diversification, and employing efficient M&A strategy as growth is starting to slow due to their
sheer size.
Threats
Threats can include macroeconomic threats such as low consumer confidence, recessions, and
currency headwinds. They also have market share threats where increasing competition can
continue to steal market share and eventually gain an upper hand. For example, Adidas has
done very well this year and their stock has been outperforming Nike this year. Another main
threat is laws and regulations surrounding taxes, labour, and sales. The main reason they
produce their products out of country is because of the high costs of production in the United
States. It simply does not make sense from a business perspective and as a result may force
them to do things they may not want to do. Sales trends are another threat facing Nike. If they
don’t adapt to market trends and continue to provide products that people want, they may lose
many customers and in the end profit; they definitely do not want to become another Research
in Motion.
Industry Drivers
Sales: will be correlated with the state of the economy and the individual supply and demand of
those products. Also, it will determine whether they are a luxury, normal, or inferior good.
Consumer confidence: the degree of optimism on the state of the economy that consumers are
expressing through their activities of savings and spending. The Index focuses on three areas:
how consumers view prospects for their own financial situation, how they view prospects for
the general economy over the near term, and their view of prospects for the economy over the
long term. Each monthly survey contains approximately 50 core questions, each of which tracks
a different aspect of consumer attitudes and expectations. The samples for the Surveys of

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Consumers are statistically designed to be representative of all American households, excluding
those in Alaska and Hawaii.
Shopper traffic: volume of purchases and consumers actively spending.
Technological advancement: Online shopping, marketing budget, information technology, in-
store experience, and green initiatives.
The retail sector reacts very strongly to negative news—Reports of weak consumer spending,
poor sales, and negative sentiment for large retail brands, affect all companies in the sector. It
is a one of the most volatile sectors that is affected by uncertain market outlook, major news
events (both positive and negative), recessions or depressions, inflation, and fluctuations in
supply and demand.
A recent example occurred on May 11th 2016 when Fossil (FOSL) reported diminishing sales
and shrinking margins. This coincided with a general sense of weak consumer spending and
caused most high-end retailers stocks to plummet in the next few days.
Current Macroeconomic Environment
Consumer Sentiment
Consumer sentiment is used to determine the public’s sentiment on their own financial
situation, the general economy over the near term, and their view of prospects for the
economy over the long term. Essentially, it is an economic indicator that shows the degree of
optimism by consumers of the overall state of the market based on their personal financial
situation. A month-on-month decreasing trend suggests consumers have a negative outlook on
their ability to secure and retain good jobs. Thus, manufacturers may expect consumers to
avoid retail purchases, particularly large-ticket items.
It is important to note that the decline of consumer confidence in 2015-2016 and uncertainty of
the market has lead Consumer Discretionary to underperform the overall market in the last 3
months.

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Appendix1—US ConsumerSentiment
Preliminary reading for November’s Consumer Sentiment increased to 91.6 from the final
reading in October of 87.2—lowest reading since September of 2015 due to less favourable
prospects for the national economy, with half of all consumers anticipating an economic
downturn sometime in the next five years. The current reading in November is the highest since
June.
Manufacturing PMI
The Manufacturing Purchasing Managers Index is derived on surveys and based on five
individual indexes with the following weights: New Orders (30 percent), Output (25 percent),
Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased
(10 percent), with the Delivery Times index inverted so that it moves in a comparable direction.
A reading above 50 indicates an expansion of the manufacturing sector compared to the
previous month; below 50 represents a contraction; while 50 indicates no change.
PMI is an important sentiment reading for manufacturing and industrials. Although, some
countries’ manufacturing industries differ in output, it can still be a good indicator of the overall
state of the economy as it tends show where economic expansion and recession begin and end.
The rate at which PMI changes month to month is also a good indicator. If a reading of 51
followed a month of 56, it would not be seen positively by investors.

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Appendix2—US ManufacturingPMI
Appendix3—US ManufacturingPMI MAX
This indicator is very important for manufacturing countries like China and can be a good
estimate for future performance of the economy and certain sectors. When used in conjunction
with Non-Manufacturing PMI, it can be a very useful tool for macroeconomic investing. We saw
declines in both the retail market and manufacturing PMI year to date. We’re seeing a steady
rise therefore manufacturers should perform better.
Non-Manufacturing PMI
Non-Manufacturing PMI is composed of four equally weighted components: business activity,
new orders, employment, and supplier deliveries. It is based on surveys of non-manufacturing
in the construction, mining, agriculture, communications, transportation, and retail trade
sectors.
The data from this indicator is reliable, not very volatile, and trends can last for months which
make it attractive for investors who seek long-term outlook on the economy. It is a very good
indicator when used in conjunction with Manufacturing PMI as it will cover industries that
account for most of GDP.

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Purchasing managers have relevant insight into latest economic developments and have early
access to data about the performance of their company which makes this a leading indicator of
economic performance.
Appendix4—Non-ManufacturingPMI
Appendix5—US Non-ManufacturingMAX
Activity, new orders and employment grew at a slower pace while prices increased for the
seventh straight month which caused the decrease.

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Main Competitors
Adidas
Appendix6—AdidasStockChart8Years
Adidas is a European Sports brand that has been manufacturing their products since 1924 and
was registered on the stock exchange in 1949. It was traditionally more established in Europe
due to their focus on soccer. However, it has been growing worldwide and has become a
successful international sports brand. Their success comes from many of their subsidiaries such
as Reebok and Taylormade, which has allowed Adidas to expand their business into other
sports and grow their market share.
Adidas struggled in early 2015 as it was underperforming Nike in key sportswear markets and
even Under Armour in some categories. Adidas then focused on running, basketball, and casual
“originals”. This allowed Adidas to report 23% in sales growth in Q2 2016. The running business
has been fuelled by strong consumer interest for Boost Technology. As a result, they’ve been
the fastest growing sportswear brand in North America recently. Despite being a European
company. However, Nike’s business is still by far the largest, generating $3.74 billion in sales in
the most recent period versus $877.6 million for Adidas and $827 million for Under Armour.

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Under Armour
Appendix7—UnderArmourStock(UA)MAX
Under Armour is a much smaller company than Nike and Adidas as it was founded in 1996 and
only went public in late 2005. However, as you can see from the stock chart, it has grown
substantially in the last 10 years and has growth rate estimates at around 20-25%. Under
Armour offers quality products through innovation, and in 2015, a 21% growth in apparel sales
helped Under Armour reach total sales of almost $4 billion USD. Although still far behind Nike,
Under Armour is expected to continue innovating, expanding, and growing. This an incredible
feat in a very competitive market such as sports retail. This has become more threatening for
Nike as UA has continued to grow and steal market share.
One mistake I believe Nike made was letting UA grow into the successful business it is today.
They have continued to grow and take a larger percentage of market share every year.
Furthermore, their marketing strategies have proven successful and have now many sponsored
athletes that Nike could have signed:
 Tom Brady.
 StephenCurry.
 Bryce Harper.
 JordanSpieth.
 LindseyVonn.
 Dwayne Johnson.
 Michael Phelps
These are big names in the sports world and have made under armour one of the most
successful and recognized brands in its industry.

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In 2008, Under Armour was trading at a huge discount and would have been a perfect
opportunity for a sports brand to acquire it. Nike being over a hundred times larger in capital
and size should have seen this as a very good opportunity to take over their competitor and
increase their brand.
Industry Analysis
While clothing and footwear production may seemlike it is not a difficult market to break into,
one would require more than just an idea but also a large amount of funds. To properly
compete with the larger and more well-known brands, a new company would have to have lots
of funds to market themselves as a better alternative. There are already quite a few brands in
the market currently and while consumers have a lot of choice, Nike is still successful in
maintaining their market share.
As this is a retail industry, consumers do hold the key to a company’s success. If they do not
agree with the way a company is doing business, they have the option of boycotting the brand.
However, since the market is very large there would have to be a unanimous agreement from
consumers to no longer purchase the product for it to have an effect on Nike’s bottom line.
While clothing and footwear are necessity items, there are cheaper alternatives and were
consumers unable to afford Nike’s items, this could cause a drop in revenue.
Individual suppliers of raw materials for Nike’s goods would not have much influence as there
are plenty of alternative suppliers. If their supplier were to increase their prices or go out of
business, Nike could easily source another supplier and with their economies of scale they
would be able to get a good price on materials.
The current market for shoes and apparel is quite saturated however there is less competition
when it comes to athletic specific clothing and footwear. The existing market is dominated by
Nike and its biggest competitors Adidas and Under Armour.
PEST Analysis
Political
Nike Inc. is an American based company and as such the industry we must focus our analysis on
is the American one. In light of the recent election, and Donald Trump becoming President1, US
businesses may benefit in some areas and in other areas they may be hurt. Since he himself is a
businessman, he will likely be focused on changing as much as he can to benefit companies.
When it comes to corporate taxes, any shift can mean a change in millions to the after tax
income. Trump had promised during his campaign that he intends on lowering the corporate

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tax rate to 15% 2, effectively cutting it in half. Depending on what other changes the Republican
Party pushes through, this could save Nike millions of dollars that they can in turn put towards
growing their company, enhancing their product lines, or paying out as dividends to their
shareholders.
The majority of Nike’s manufacturing facilities are located in China; however, Nike also has
plants in Vietnam, Australia, Canada, and Mexico. These countries are all involved in the Trans
Pacific Partnership trade agreement that was drafted in 20153. The TPP covers a wide range of
business related topics such as labour standards, environmental protection, and human rights.
Nike has been often criticized for their poor labour standards and their disregard for the
pollution their plants emit, but if the TPP is in force, this can affect their daily operations and
force Nike to modify their current production to adhere to these regulations. One of the main
functions of the TPP is to reduce trade barriers by eliminating tariffs. With the elimination of
tariffs this could give potential competition from participating countries the opportunity to gain
some of Nike’s market share. On the other side of this, with lowered tariffs in other countries,
Nike may gain some market share in countries that were previously too expensive, as well they
could acquire inventory at a much lower cost. Donald Trump is outspoken against the TPP and
does not intend on allowing the USA to be a part of it4. If the US is not involved in the TPP,
there may be little impact on Nike Inc.
Economic
The US economy is projected for a market downturn. This would mean job loss, and while
clothing and footwear are essentially a necessity, the newly unemployed will seek cheaper and
more cost effective alternatives5. Nike has expressed interest in expanding their mid-range
footwear line and in the event of a downturn this would mean that they could maintain their
market share and keep their brand alive. Nike has managed to outperform the market during
the last downturn and they are likely to continue this trend.
With the changing laws regarding labour standards in overseas countries such as China6, Nike
may soon find that their overhead costs will increase. An increase in their production costs
would mean that Nike would have to increase their sale price so as to maintain earnings, which
may mean that consumers seek elsewhere for comparable products. If Nike were adamant
against hiking up their costs, another alternative would be for them to reduce or eliminate
dividend payments to shareholder, which could cause a mass selloff of their shares resulting in
a drop in share price.
Being a fortune 500 company, Nike will have little to no issue accessing funds to expand their
product line. If they decided to not utilize their retained earnings, they could issue more equity,
or even issue debt. Being that they are a large, publicly traded company that has been

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performing above the market, they would have plenty of buyers eager to purchase shares or
bonds.
Social
Nike has been accused in the past for their use of child labour from developing countries. This
had caused uproar for consumers who are now becoming more aware of how the items they
purchase are made. As well, consumers are more environmentally conscious regarding the
manufacturing of their goods and are doing more research into companies’ emissions. They
tend to be willing to pay more for products that adhere to their socially responsible morals.
While Nike has worked on fixing their child labour image, they must find a way to best capitalize
on all social concerns as other clothing and shoe manufacturers have7.
A growing number of the world’s population in developed countries are becoming more health
focused8. They are participating in more sports, attending the gym more often, and overall
being more active. This requires them to properly outfit themselves with athletic clothing and
footwear and Nike is one of the most recognizable sports brands. While Nike is often associated
with the more serious athlete, if they shift their attention to the casual health conscious
consumer, they can increase their sales.
Technological
With rapid advances in technology the production of footwear and attire is constantly changing.
Product design can now be done in a fraction of the time on a computer as opposed to being
drawn by hand. The advent of robotics in the manufacturing industry is minimizing the need for
human labour. A higher initial investment of the robotics installation can mean greater wage
savings in the long run. Keeping in mind that Nike employs many people and with the potential
job loss from these technological advances there could be a public backlash9.
Thanks to social media and the internet it is extremely easy for a company to be everywhere.
While there have been television and radio commercials for quite some time, utilizing social
media for marketing purposes gets the brand to reach markets that may not have come into
contact with the brand previously10. Maintaining a positive corporate Twitter, Facebook and
Instagram means that they can market their products for a fraction of the cost since these
platforms are free. When it comes to the internet and social media any negative can go viral
quite fast and if it is not correctly addressed it can affect sales11.
Financial Analysis
WACC

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WACC = (E/V) * Re + (D/V) * Rd * (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
WACC—Weighted Average Cost of Capital— is defined as the weighted average of cost of each
component of capital (equity, debt, preference shares etc) where the weights used are target
capital structure weights expressed in terms of market values.
Typically, the discount rate for debt closely follows the interest rate that the
company pays on debt issuances. To determine the intrinsic value of a company, you must
calculate the present value of all future cash flows using the appropriate discount rate (most
often the WACC) and if the asking price is less than the intrinsic value, invest; if the asking
price is greater than the intrinsic value, do not invest. The
IRR is the discount rate at which NPV is zero and if the IRR is greater than
the discount rate, invest.
Cost of Debt
Joanna Cohen estimated Nike’s cost of debt to be 4.3%. She calculated this by taking the total
interest expense for the year (2001) and dividing by the company's average debt balance.
Joanna’s mistake in the calculation of Nike’s cost of debt was using the book values of debt
rather than the market value of debt. Using the current market prices allows us to know how
much it will cost the firm to raise the required capital using today’s numbers. Book values are
not as accurate of a cost estimate as the market values are; they are better when using with
historical values of debt.
Cost of Equity
The cost of equity is most commonly calculated through the Dividend Discount Model (DDM) or
the Capital Asset Pricing Model (CAPM). Companies are not required by law to pay out
dividends to their shareholders. As a result, this makes the DDM less accurate than the CAPM
for calculating the Cost of Equity. Joanna also decided that the CAPM was superior to the DDM,
and came up with 10.46%.
CAPM
Using the CAPM to find the cost of equity, the following formula can be used:

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CAPM= kE = rF+ [β*(M-rF)]
rF= Risk free rate
β= Beta
M-rF= Market risk premium
Although Joanna used a 20-year treasury yield for the Risk Free Rate, we decided to use the US
Government 10 year yield. However, that would not lead to a huge change in the calculation. As
seen in the chart below the RF used in our calculations was 2.2277
Appendix8—US GenericGov’t10Year Yield
Beta
The beta helps us understanding the relative risk of the security to the market. Joanna took the
average beta from 1996-2001 which equalled 0.80. We used the Bloomberg generated Beta of
the security which equalled 0.99. I think this could be advantageous as Consumer Discretionary
is very correlated with the moves of overall market—hence its highly cyclical nature.
Market RiskPremium
Market risk premium is the difference between the expected return on a market portfolio and
the risk-free rate. Market risk premium is equal to the slope of the security market line. Joana
used a geometric average in determining the market risk premium which is beneficial and most
accurate—as it takes into account actual returns and not average returns like the arithmetic
average.

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Appendix9—MarketRiskPremium
In calculating expected market return we took the historical average from the United States
markets which equal 9.263%.
This was calculated by the equation:
CAPM=kE=rf+(B*Mkt.Risk Premium)
kE= 2.227 + (0.99*7.037)
kE= 2.227 + 7.027
kE= 9.263%
As opposed to Joanna’s calculation of:
CAPM=kE=rf+(B*Mkt.Risk Premium)
kE= 5.74+ (0.80*5.90)
kE= 5.74 + 4.72
kE= 10.46%
Capital Structure
Now the Final step of WACC is to calculate the appropriate weightings of the debt and equity of
Nike. Joanna estimated the capital structure to be 27% debt and 73% equity but once again
made the mistake of using book values opposed to market values.

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Appendix10—Nike’sCapital Structure
As you can see from our Bloomberg calculations:
Market Cap = 97.90%
Short Term Debt = 0.10%
Long Term Debt = 2.00%
Total = 100%
These are the proper weights to determine our WACC which equals 9.10% opposed to Joanna’s
WACC of 8.39%.
Ratio Analysis
*See appendix for charts 1-4
Liquidity Ratios
Nike’s Liquidity ratios are fairly good. They carried a current ratio of 1.6806 in 2014/15 and a
current ratio of 2.0290 in 2015/16. The increase in this ratio is an indication of growth and
strength in Nike’s balance sheet. Nike also has a Quick ratio of 1.2320 up from 1.0049 in
2014/15, which is well above the Apparel, Footwear and Accessories industry average of .74
(CSIMarket). These numbers indicate that Nike is fully capable of covering its short-term
liabilities without the excess sale of assets and inventory.

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Activity Ratios
Nike has a total asset turnover ratio of 1.6253, which is currently higher than industry
competitors Adidas (1.31) and Under Armour (1.60) (Morningstar). A higher total asset
turnover is always a good thing as it shows how well a company uses their assets to generate
sales and currently Nike is beating its competitors in this category. Despite Nike’s excellent
total asset turnover they have a fairly high Average Collection Period of 61.37 days. This could
come as a concern to management as they may not be effectively collecting their receivables
and this would affect the bottom line. They should consider altering their terms to encourage
buyers to pay in timely manner. By comparison Nike has a low days in inventory. They have
days in inventory ratio of 90.5460 days whereas competitors, Under Armour, have a days in
inventory ratio of 116.35 days (Market Watch). This means Nike is considerably faster at turning
over their inventory then their competitors. If Nike is able to reduce their average collection
period by enticing buyers to meet payment deadlines they will have an advantage over their
competitors taking advantage of their assets, their receivables and their inventory.
Financial Leverage ratios
Nike has had drops in their Debt ratio and Debt-to-Equity ratios in the last fiscal year. The Debt
Ratio has dropped from .4457 in 2014/15 to .3819 in 2015/16. Their Debt-to-Equity has also
fallen from .8324 to .6360. By comparison they have a lower debt ratio than both Adidas
(.5772) and Under Armour (.4181), their two major competitors (Market Watch). Although a
debt ratio under .4 is often considered good, the lowered ratios may mean that Nike is
underleveraged. This could be taken as a positive, as it gives Nike a lot of room for growth. They
have underutilized debt financing and could leverage their firm to increase revenue. Their Low
debt to equity ratio is also an indicating that they have relied heavily on equity financing and
could be leveraged further as a firm. Nike’s largest competitor Adidas has a significantly higher
Debt-to-Equity ratio of 1.3628 (Market Watch). Adidas’ success could be attributed to their
leverage and Nike could take a page or two out of their book to become more financially
successful.
Profitability Ratios
Nike has competitive profitability ratios and outperforms both Adidas and Under Armour in
some ratios. Nike has a net profit margin of 6.21%, higher then both Adidas (4.02%) and Under
Armour (5.87%). But they underperform against these competitors in their EBIT margin
(10.33%). Adidas (10.35%) marginally outperforms Nike, whereas Under Armour has the highest
margin of 13.10% (Market Watch). Nike has a very health gross return on assets of 15.78%,
although Under Armour does outperform them by slightly over 5% (20.90%). Nike also has a
return on equity of 17.79%, which is higher than both Adidas and Under Armour’s (Market
Watch). Also Nike has a fairly low debt to equity ratio and their reliance on equity financing
means that they could increase their return on equity even further by leveraging the firm

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through debt financing. Also this reliance on equity financing makes their return on equity a
very reliable indication of Nike’s financial health.
Under Armour:
Debt ratio = .418118
Debt-to-Equity = .71.8563
Net Profit Margin= 5.8730%
EBITDA Margin= 13.10%
Gross ROA = 20.8970%
ROE = 15.4020%
Adidas:
Debt Ratio= .5772114
Debt-to-Equity= 1.362832
Net Profit Margin = 4.0189%
EBITDA Margin = 10.35%
Gross ROA = 13.5135%
ROE = 12.0461%
Discounted Cash Flow
The aim of a DCF Analysis is to determine how much you would pay for a company knowing the
amount of free cash flow it will generate in the future. You can then compare this to the Equity
or Enterprise value. To determine the total value of a company you will need to calculate two
values: The near-term value, and the terminal value. The near-term value is simply a Net
Present Value calculation. The Net Present Value is calculated using the formula: Free Cash
Flow/ (1+Discount Rate)^T where T represents the year that the free cash flow occurs.
Once you have calculated the Present Value for each period, add these values and you
will have the net present value for the entire investment opportunity.
Terminal value is NPV of a company’s cash flows if it continues to grow for an infinite period. It
is calculated using a present value growing perpetuity. This is calculated as: Ct+1/r-g where C
is the free cash flow at a specific period, r is the discount rate, and g is the rate at which the
free cash flow is growing.
Once the NPV of both the cash flows and terminal value is calculated, the sum will equal the
total value of the firm.

18 | P a g e
Appendix11—DCFNIKE

19 | P a g e
Using the information from our DCF model we can see that Nike is currently trading at a
discount and the price target is $77.49 with a potential upside of 54%. Of course, we can use
sensitivity analysis to determine the return in situations of less growth and situations of
changing WACC. At our lowest growth rate of 4.3% and highest cost of capital of 10.1%, the
upside would still be 5%.
Credit Risk
Although being the largest sportswear company globally, it is still important to look at a
company’s debt structure and determine the likelihood of bond defaults and credit risk. With a
IG5 rating and 1yr default probability of 0.0153% we can see that Nike Debt structure is very
strong at the moment. Also, carrying very low short term debt which enables easy pay-offs. Not
only that but it carries very low debt to equity compared to the median and average of their
industry.

20 | P a g e
Appendix12—RiskScale
Appendix13—NikesCreditRisk
Relative Valuation
Another mistake I believe Joanna makes is basing her decision to purchase Nike Solely based on
a WACC and DCF analysis. It would be difficult to be a successful investor if that is the only
method you used. An investor needs to take into account macroeconomic trends, industry
trends, technical analysis, relative analysis, and many more to be able to make savvy financial
decisions.

21 | P a g e
Appendix14—RV vs.Self5years
Appendix15—RV vs.Self2years
As you can see the 5 years has it slightly on par with all of its multiples except for P/E which
determines it is trading at a discount—PE being one of the most important multiples when

22 | P a g e
value investing. It also shows that the PE is reaching the lower end of 1 Standard Deviation from
the mean PE.
In its two year chart we can clearly see that it is trading at a steep discount with every metric
indicating it is far lower than its historic average. PE is trading at a negative 2.4 Standard
Deviation from its mean PE which indicates a very strong oversold stock and buying
opportunity.
Appendix16—Nikevs.PeersMarketCap1B+5 Year

23 | P a g e
Appendix17—Nikevs.PeersMarketCap1B+2 Year
As shown in the charts, Nike is trading at a discount even when compared to its peers whom
are also struggling in the retail market—due to currency headwinds and decrease in sales
numbers. This shows that even in a beat up industry, Nike stock price has been beat down more
than its competitors.
Appendix 18-- RV vs. Peers YTD

November23,2016
24 | P a g e
Technical Analysis
Appendix19—NikeStockChart
Appendix20—NikeStockChart2years
Technical allows us to see market trends and patterns through the trading of their stock. Simply
doing Cost of Capital, DCF’s, and RV calculations don’t provide a broader picture as the stock
chart does. Undervalued stocks can stay that way for long periods of time and vice versa. As

25 | P a g e
were seeing here Nike has been undervalued for a long period of time yet has stayed in a
negative channel for approximately a year and it continues to find lower highs and lower lows.
Nike is the longest negative channel since 2008-2009. They broke the channel line and are
possibly seeing a higher high but it is consolidating at that point—first time it rebounded to the
previous drop off point which is a positive signal. RSI is the highest since September which
shows positive momentum and a possible trend change. However, this could also retract very
soon and where it retracts to is a very important measure of evaluation—determining whether
it is a boy, hold, or sells. MACD is trending positive for longest period of time since august but
the momentum is very weak. The 50-day MA is trading well below the 200-day MA which is
once again showing the current weakness and negative trend; still a long way to see
convergence of the MAs.
Overall the chart shows we could see a rebound to the 200-day MA point which is around 55-
56. However, we may see a double peak as we did with last two positive momentum periods.
Depending on what point it finds resistance will determine whether it is a bullish or bearish
signal and determine whether it is a long term positive trend change—shooting past the 200-
MA and seeing a higher high would be very bullish. In conclusion, based on the information on
the technicals, Nike is a Buy or a Hold to buy for the short term (1-3 month period) as it signals
a short term positive trend change. Longer term will be determined when we hit a resistance
point.
Recommendation
Nike is an excellent addition to North Point financials large cap fund. Based on a thorough
analysis of Nike, Inc.’s financials as well as a company and industry analysis, Nike would be a
good addition to Kimi’s fund.
It is important to note the negative trend with Nike and the retail industry, however, the
financial analysis determined that Nike was currently undervalued and an acquisition of shares
could generate a good return on investment. The ratio analysis indicates that Nike’s overall
performance is ahead of their main competitors and that they are often above the industry
average. They have excellent liquidity ratios and profit margins and perform averagely in
regards to activity ratios. Their only downfall can actually be seen as a major opportunity to
grow the firm and see major returns, something North Point should as investors see as
desirable. Their lack of reliance on debt financing and their lack of overall leverage in the firm
have stunted the firm’s growth. If they reduce the amount of reliance on costly equity financing
and leverage themselves with a healthy amount of debt Nike could see serious growth.

26 | P a g e
Not only do the numbers support a purchase of Nike shares, but when taking a look at the
qualitative analysis, Nike is a win. With society becoming more conscious consumer, Nike is
working towards meeting the consumer demands regarding the environment as well as labour
conditions. As consumers are moving towards a healthier lifestyle, the demand for sporting
attire increases and Nike, being the most well-known brand, is geared to increase its sales.
Overall our recommendation is to purchase Nike for NorthPoint Group as all indicators and
metrics are positioned for a positive return.

27 | P a g e
Appendix—Ratio Charts
Less
Cash Ratio 0.1188 0.1701
Cash $254.30 $304.00
Current Liabilities $2,140 $1,786.70
Quick Ratio 1.0049 1.232
Cash Ratio 2014/15 2015/16
Inventories $1,446 $1,424.10
Quick Ratio 2014/15 2015/16
Current Assets $3,596.40 $3,625.30
Current Ratio 1.6806 2.029
Liquidity Ratios:
Current Ratio 2014/15 2015/16
Current Assets $3,596.40 $3,625.30
Financial Leverage Ratios
Debt Ratio 2014/15 2015/16
Total Debt $2,610.30 $2,222.60
Total Assets $5,856.90 $5,819.60
Debt Ratio 0.44568 0.38192
Debt-to-equity Ratio 2014/15 2015/16
Total Debt $2,610.30 $2,222.60
Total Equity $3,136.00 $3,494.50
Debt-to-equity 0.83237 0.63603
Payable Turnover 2014/15 2015/16
Cost of Goods Sold $5,403.80 $5,784.90
Average Accounts Payable$543.80 $975.80
Payable Turnover 9.93711 5.92837
Average Payment Period 2014/15 2015/16
Days in period 365 365
Payable Turnover 9.93711 5.92837
36.731 61.56836A.P.P.
Inventory Turnover 3.73707 4.0311
Days in Inventory 97.6701 90.546
Days in Inventory 2014/15 2015/16
Days in Period 365 365
Average Inventory $1,446.00 $1,435.05
Inventory Turnover 3.73707 4.0311
Inventory Turnover 2014/15 2015/16
Cost of Goods Sold $5,403.80 $5,784.90
Recievables
turnover
5.73155 5.9476
A.C.P. 63.6826 61.3693
Average Collection Period 2014/15 2015/16
Days in Period 365 365
Average
Recievables
$1,569.40 1595.4
Recievables
Turnover
5.73155 5.9476
Recievables Turnover 2014/15 2015/16
Total operating
Revenue
$8,995.10 $9,488.80
Average total
Asstes
$5,856.90 $5,838.25
T.A.T. 1.53581 1.6253
Total Asset Turnover 2014/15 2015/16
Total operating
Revenue
$8,995.10 $9,488.80
Activity Ratios:

28 | P a g e
Retention Ratio 0.6372 0.77901
Sustainable Growth
Rate
28.62% 22.83%
Sustainable Growth Rate 2014/15 2015/16
Return on Equity 0.182366 0.177875
Net Income $579.10 $589.70
Retention Ratio 0.6372 0.77901
Retention Ratio 2014/15 2015/16
Annual Retained
Earnings
$369.00 $459.38
Net Income $579.10 $589.70
Payout Ratio 0.3628 0.22099
Payout Ratio 2014/15 2015/16
Cash dividends $210.10 $130.32
Average Shareholders Equity $3,136.00 $3,315.25
R.O.E. 18.24% 17.79%
Return on Equity 2014/15 2015/16
Net Income $571.90 $589.70
Average Total
Assets
$5,856.90 $5,838.25
Gross ROA 15.69% 15.78%
Gross Return on Assets 2014/15 2015/16
EBIT $919.20 $921.40
Average Total
Assets
$5,856.90 $5,838.25
Net ROA 9.76% 10.10%
Net Return on Assets 2014/15 2015/16
Net Income $571.90 $589.70
Total Operating
Revenue
$8,995.10 $9,488.80
EBITDA Margin 10.72% 10.33%
EBITDA Margin 2014/15 2015/16
EBITDA $964.20 $980.10
Total Operating
Revenue
$8,995.10 $9,488.80
Net Profit Margin 6.44% 6.21%
Profitability Ratios
Net Profit Margin 2014/15 2015/16
Net Income $579.10 $589.70

29 | P a g e
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H. (2016). Market Value vs. Book Value WACC. Retrieved November 23, 2016, from
https://www.efinancemanagement.com/investment-decisions/market-vs-book-value-wacc
ICLG: Employment & Labour Law 2016 - China - International Comparative Legal Guides.
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areas/employment-and-labour-law/employment-and-labour-law-2016/china
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The 10 Worst Social Media Screwups: How to Ruin Your Brand in 140 Characters. (n.d.).
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