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1. 1 CASE 14: Nike, Inc.: Cost of CapitalPresented By:Divya Mishra

3. Problem Identification

4. SWOT Analysis

5. Data Analysis

6. Recommendation

7. Questions2 AGENDA

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 5003

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.

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.

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

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

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 price8

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

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

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

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

58. Earning capitalization model-Ignore the growth of company

59. Data analysis Excel.xlsx DATA ANALYSIS 14 DATA ANALYSIS

62. The gross margin and operation margin show the same trend.16 KEY FINANCIAL DATA

63. RECOMMENDATION

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