Samantha Luna

FINA 3386-90L
Case #2: Nike, Inc.
North point group is a mutual fund management firm that has a portfolio manager named ‘Kimi

Ford’. Ford was taking into account to invest within the fund she manages, which she in many

instances uses Fortune 500 with old-economy stocks. At the beginning of the year, Nike’s share

price dropped significantly at the beginning of the year (Case Studies in Finance, Pg. 235).

North point group had a very good performance even though the stock market had declined

almost the past 18 months. In 2000, Standard and Poor’s 500 (S&P 500’s) fell 10.1% and

Northpoint still had a fund return of 20.7% (Case Studies in Finance, Pg. 235). The end of June

fund still had a YTD return of 6.4% meanwhile, S&B 500 had declined to -7.3%. On June 28th

Nike had held a meeting for the disclosure of their 2001 fiscal-year results (Case Studies in

Finance, Pg. 235). The true meaning of that meeting was that Nike management wanted to talk

about revitalizing the company with a strategy they had. Their reports had stated that their

1997 revenue was stabilized at 9B, meanwhile, their net income fell from 800M to 580M which

is a very big change. 8ikmij8uNike’s business segment diminished 6% within the time span of 3

years around all U.S. athletic footwear. Nikes management talked about emerging production

within more athletic shoes within the mispriced segment. They also wanted to increase their

apparel line, which had done great under the recent leadership of Mindy Grossman. During the

meeting they communicated prolonged income augmentation from 8% up to 10% as long as

they had additional expense control having a earnings increment over 15%. Kim had no

weighing guidance if to invest or not invest towards Ford stock shares. Since there were

different opinions such as Lehman Brothers said it was a strong buy but, UBS Warburg & CSFB

recommended a hold (Case Studies in Finance, Pg. 236). Ford decided to do their own

discounted cash flow forecast for a much transparent decision at a 12% discounted rate. It
 Samantha Luna
FINA 3386-90L
Case #2: Nike, Inc.
resulted in Nike having an overvalued share price of $42.09. On the other hand, their quick

sensitivity analysis revealed it was undervalued within the discount rate at 11.7%.
 Samantha Luna
FINA 3386-90L
Case #2: Nike, Inc.
As I reviewed the data and made my calculations, I am submitting a cost-of-capital and a memo.

Within the excel you can see that my calculation and how they were acquired. So, the first

estimation I did within the data provided I got ‘The Average Weights of Cost Capital”, meaning I

was going to calculate total capital of debt and capital of equity. Total capital of debt is also

named debt-to-ratio which is calculated by summing up entirely the liabilities from the

company and diving them by means of the total capital of the whole company and that will give

you the company’s financial leverage over the debt. In this case Nike’s capital debt was 27.06%;

the larger the percentage of capital debt the riskier the company is. To obtain the total capital

of equity you have to divide the total capital equity by total capital, giving us a wide perspective

on how the company is financing their operations if either with their own funds or debts. It

demonstrates on how shareholder equity can have the capability to take over the debts within

certain circumstance, which Nike has a 72.94% through total capital equity. Meaning they are in

good standing with their shareholder equity capabilities.

Secondly, I proceeded to calculate the after tax-costs of debt by subtracting the effective tax

rate by 1 and multiplying it with the costs of debt. The after tax-cost of debt was 2.7%, which is

how much an interest tax shield is. Lastly, I calculated the Cost of Equity and got percentages

for CAPM and WACC. The weighted average cost of capital calculated to 8.40%, having the

significance of their costs. As we can see from Exhibit 3, we can see that the Notes Payable,

which is short term loans are taking of most of the debt by more than 50%. CAPM remembers

deliberate possibility by consolidating Beta for the Cost of Equity equation. Utilizing the stock's

Beta to figure value which will give a return rate dependent on how the possibility of the stock

is seen by financial backers. As Nike’s management was informing within the meeting is that
 Samantha Luna
FINA 3386-90L
Case #2: Nike, Inc.
they were going to increase their athletic shoes towards a more mispriced segment to be more

economically affordable to the modern-day consumer and increasing onto having a bigger

apparel line for beyond their already customers to keep up with modern-day trends and

fashion innovations. These actions of emerging production mean that there will be no change in

risk but there will be a change in more expense control and have long term revenue growth

which can be more appealing in price towards consumers in order to increase company

revenue attracting more investors towards the company bringing in more equity for better

quarter reports for their income statement. Average Debt Balance was calculated by combining

the debt balances from 2000 and 2001 debt years, giving Nike an average debt balance of

$1,370.

We are calculating for WACC because of the simplicity it provides towards a prompt decision

making. As we got 8.40% for our Weighted Average of Cost of Capital (WACC), which makes

Nike undervalued. Ford had made their own analysis which they utilized with a 12% discount

rate resulting in an overvalued stock share price of $42.09. In consequence when we calculated

WACC we got an 8.40% making Nike’s stock undervalued by almost 3% from the discount rate

they received of 11.7%. As from Fords analysis we do suggest Kiki Ford which is North Point

Group portfolio manager to throw in Nike as a good investment within this period because

based on the examinations the company is undervalued so the buyer would really show good

profit margins towards investors like Ford.

Since our cost of equity is undervalued our pay to our equity investors is also undervalued along

with our discount rate. Even if Nike is undervalued and Ford recommends North Point Group to

add it to their list, they have to keep an eye on the revitalizing strategy. Since this strategy does
 Samantha Luna
FINA 3386-90L
Case #2: Nike, Inc.
not happen within one day it takes time. North Point Group is a mutual fund that mostly uses

old-economy stocks, but with all the data provided and acquired thanks to analytical

instruments, it is safe to say that Nike is a good investment for potential return due to its

innovative strategies as well as its wide variety of growth in modern-day society. Ford would

prominently make a great profit margin in investing in this stock due to the Nike Corp. stock

being undervalued by 3%, not including its future growth in the new unreviewed project the

company may have for the future. This means Kimi ford has a great potential of seeing a great

return in the north point group company; as a portfolio manager she should analyze all the data

provided and see previous charts and how change has positively affected Nike in the athletic

retail industry assuming that this is a very prestigious brand and known amongst the modern-

day consumer in America.

1. https://efinancemanagement.com/investment-decisions/evaluating-new-projects-with-

weighted-average-cost-of-capital-wacc

2. Bruner, Kenneth Eades, et al. Case Studies in Finance ‘managing for corporate