Running head: CASE 14 - NIKE, INC.

: COST OF CAPITAL

Case 14 - Nike, Inc.: Cost of Capital

CASE 14 - NIKE, INC.: COST OF CAPITAL NorthPoint Group is a mutual-fund management firm who invests primarily in Fortune 500 companies. Its top holdings include ExxonMobil, General Motors, McDonalds, 3M and other large-cap stocks (Bruner, Eades, & Schill, 2010, p. 209). Kimi Ford, a portfolio manager at NorthPoint Group, was analyzing Nike, Inc.s share price. Ford was interested in buying some shares for the fund she managed, the NorthPoint Group Large-Cap Fund. Although the stock market declined throughout the last 18 months, NorthPoint Large-Cap performed quite well (Bruner, Eades, & Schill, 2010, p. 209). According to the case, in 2000, the fund earned a return of 20.7%, even

though S&P 500 fell 10.1%. The month end of June 2001, the funds year-to-date returns were placed at 6.4% compared to -7.3% for the S&P 500. In June 2001 analysts for Nike, a major player in the U.S. athletic shoe market, met to review the companys fiscal year 2001 figures. From 1997 to 2001, its revenues remained consistent at approximately $9 billion while Nikes net income had decreased from almost $800 million to about $590 million. The market share for athletic shoes in the U.S. decreased from 48% in 1997 to 42% in 2000. There were also supply-chain concerns along with a negative effect the strong dollar had on revenue (Bruner, Eades, & Schill, 2010, p. 209). Nikes management team disclosed a strategy regarding their top-line growth and operating performance. In order for the company to increase its revenue, the company would need to develop athletic shoe products that were priced reasonably. In addition to this, Nike also planned to drive its apparel line to the market, which had fared quite nicely since Mindy Grossman, former president and chief executive of Jones Apparel Groups Polo Jeans division, began leading this effort in September 2000. Nikes long-

CASE 14 - NIKE, INC.: COST OF CAPITAL term revenue growth was said to target 8%-10% and its earnings-growth targets higher than 15%. The problem faced by Kimi Ford was whether or not NorthPoint Group should invest in Nike. Analysts had varying opinions; Lehman Brothers recommended investing, and UBS Warburg and CSFB had doubts about the company and recommended holding off on the investment. At this time, Ford decided to create a discounted cash flow forecast to come to a clearer consensus. Fords forecast noted that Nikes current share price of $42.09 was overvalued at a 12% discount rate and undervalued with a discount rate of less than 11.17%. Ford advised her new assistant, Joanna Cohen, to estimate Nikes cost of capital so she would be prepared for an upcoming meeting to determine whether the investment in Nike should be made or disregarded.

CASE 14 - NIKE, INC.: COST OF CAPITAL

References Bruner, R. F., Eades, K. M., & Schill, M. J. (2010). Case Studies in Finance-Managing for Corporate Value Creation (6th ed.). New York, NY: McGraw-Hill/Irwin.