FINANCE

NIKE, INC. : COST OF CAPITAL

Azwimar Putranusa
Anugrah Tri Padma
Syachriani Syam
Anindya Prawita Sari

29114335
29114397
29114384
29114337

YP 52 B

SCHOOL OF BUSINESS AND MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2015

Background
Kimi Ford, a portofolio manager in NorthPoint group, a mutual-fund management firm
analyze Nikes share price. In the beginning of the year Nike share price had declined
significantly. Ford considered to buy shares for the fund she managed. In 2000 fund earned a
return of 20,7% even as the S&P 500 fell 10,1%. At the end of June 2001, the fundstear to date
returns stood at 6,4% versus 7,3% for S&P 500.
On June 28, 2001,Nike held an analyst meeting to ths close its fiscal year 2001 results. Nike
management wanted to revitalize the company.

Since 1997

The Performance of Nike for Several Years

Revenue
$ 9 billion
Net income
Fallen $ 800 million to $ 580 million
Market Share
(1997) 48% to (2000) 42%

Supply chain issues and the adverse effect of strong dollars negatively affected revenue. To
boost revenue, the company would develop more athletic shoe products in the midprice segment,
a segment that Nike had overlooked in recent years. Nike also plan to push its apparel line. On
the cost side Nike would exert more effort on expense control. Finally, company executive
reiterated their long-term revenue growth target of 8%-10% and earnings-growth target above
15%. Kimi Ford has done a cash flow estimation, and ask her assistant, Joanna Cohen to
estimate cost of capital.

Problem

Significantly Decline of Nikes share price from the beginning of the year.
In 2000, the fund earned a return of 20,7%, even as the S&P 500 fell 10.1%.
At the end of June 2001, the funds year to date returns stood at 6,4% versus 7,3% for the
S&P 500.
Nike market share in US athletic shoes fallen from 48% to 42% in 2000.
Ford must considered to buying shares for the fund that she managed.

Analysis
Value of Equity (E)
Given :
Stock Price

= $ 42.09

Number of Share Outstanding

= $ 273.3

Value of Equity (E)

= Stock Price x Number of Share Outstanding

= $ 42.09 x $ 273.3
= $ 11503.197

Value of Debt (D)

Given :
Long-term Debt

= $ 435.9

Value of Debt (D)

= Long Term Debt

= $ 435.9

Weight of Debt (WD)

Given :
Value of Debt (D)

= 435.9

Value of Equity (E)= 11503.197

Weight of Debt (WD)

= D/(D+E)
= 435.9 / (435.9 + 11503.197)
= 0.0364
= 3.64 %

Weight of Equity (WE)

Given :
Value of Equity (E)= 11503.197
Value of Debt (D)

= 435.9

Weight of Equity (WE)

= E/(D+E)
= 11503.197 / (435.9 + 11503.197)
= 0.9635
= 96.35%

Cost of Debt Before Tax (rd)

$ 1000Nd
n
Cost of Debt Before Tax (r d )=
Nd+ $ 1000
2
I+

= Annual interest in dollars

Nd = Net proceeds from the sale of debt

= Number of years to the bonds maturity

Given :
I

= 6.75% : 2
= 3.375 %
= 0.03375

Nd = $ 95,60
n

= 20 years x 2 (because of semi annually)

= 40

$ 1000$ 95.60
40
$ 95.60+ $ 1000
2

0.03375+
Cost of Debt Before Tax(r d )=

Before Tax Cost of Debt (r d )=0.041335

Cost of Debt After Tax ( ri)

After Tax Cost of Debt ( r i )=r d (1T )
Where :
ri

= after tax cost of debt

rd

= before tax cost of debt

= tax rate

Given :
rd

= 0.041335

= 38%

After Tax Cost of Debt ( r i )=r d (1T )

After Tax Cost of Debt ( r i )=0.041335 (138 )

After Tax Cost of Debt ( r i )=0.0256277
Cost of Equity (Ke)
Cost of Equity = Rf + [b x Rm]
Where :
Rf = Risk free rate
b

= beta

Rm = Risk premium
Given :
Rf = 3.59 %
b

= 0.690

Rm = 5.90%
Cost of Equity = Rf + [b x Rm]
Cost of Equity = 3.59%+ [0.690 x 5.90%]
Cost of Equity = 7.661%
Source of Capital
Long Term Debt
Equity
Total

Data
$435.9
$11503.197
$11939.097

Weight
0.1012
0.8987
99.99%

Cost
2.56277%
7.661%
WACC

Weighted Cost
0.259 %
6.8849%
7.144%

Conclusion
FortheconclusionoftheNike,inc.:CostOfCapital,WegetanewWACC=7.144%,itslower
thanJoannaCohenscalculationofWACC=8.4%.Withthetotalofweightofdebt/equity=
99.99%andforthetotaldataofLongtermdebtandequity=$11939.097.
D1=D0 x( 1+ g)
D 1=0.48 x (1+5.50 )
D1=0.5064

P0=

D1
r s g

P0=

0.5064
7.144 5.50

P0=$ 30.803
So, if we compare market price between fair value, Nike, Inc. is overvalued. Which mean, Kimi
shouldnt buy Nike, Inc.

Suggestion
SuggestionthatwecanbegivenforthiscaseisnottobuysharesNikebecausefairvalueis
belowthanmarketprice.Fromthecalculationandanalysis,thenKimiFordhasnottobuyNike
stock.Thisisbecausenotsecureenoughstocknike,nikequitedramaticdevelopmentthanany
othercompanyintheindustry.But,stocknikepotential.Nikesharesasalongterminvestment
isalwaysbeautiful,butalsobuyashorttimetobecarefulbecauseoftherapidchangesofthe
industry,changesinNike,changingtrendsinthefootwearindustry,andsoon.Inaddition,Ford
KimiAlsodonotforgettomonitortheactivitiesveryclosely.