nike sindikat 2

7/29/2019 NIKE Sindikat 2

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KELOMPOK 2H A DI S U N DO Y O

E K O Z U N I A N T O

N U R A D I K U N C O RO

M U S T I K A A J IAC H M A D H A S PA N I

DW I W O R O J A TI

DUDY HATARI

R A H M A T T A U F I K

NIKE INC : COST OF CAPITAL


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CASE BACKGROUND

Kimi Ford, a portfolio manager at North Point Group, a mutual fundmanager firm.

Northpoint thinking to buy Nikes stock

Nikes stock decline in profits and market share in recent years

Nike will increase in mid-price product that will cut down expenses Market responds the Nikes action

Kimi Ford has done a case flow estimation for Nike, and asked herAssistance to estimate Nikes cost of capita.

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COMPANY PROFILE

North Point Group

North Point Group, a mutual fund managerment firm

Invested mostly in Fortune 500 companies, including Exxon Mobil,General Motors, McDonalds, 3M, etc.

In 2000, the fund earned a return of 20,7% even the S&P 500 fell 10.1 % At the end of June 2001 gain 6,4% vs the S&P 500s -7.3%

Nike Inc.

The athletic-shoe manufacturer

Revenue in 2001, $9 billion

Net income fallen from $800 million to $580 million

Market share dropped from 48% in 1997 to 42% in 2000

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COMPANY PERFORMANCE

Northpoint

Constantly profitable

Annual Sales Growth : 18%

Gross sales projection : 90.9 million Rs in the FY ended December 31,

2001. Net Profit : 2.6 million (in 2000)

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Q&A (1)

Q:What is WACC and why is it important to estimate a firms cost of capital?

A: WACC (Weight Average Cos t of Capital) is A calculation of a firm's cost of capitalin which each category of capital is proportionately weighted. All capital sources -

common stock, preferred stock, bonds and any other long-term debt - areincluded in a WACC calculation. All else equal, the WACC of a firm increases asthe beta and rate of return on equity increases, as an increase in WACC notes adecrease in valuation and a higher risk.

The WACC is set by the investors (or markets), not by managers. Therefore, wecannot observe the true WACC, we can only estimate it

Since WACC is the minimum return required by capital providers, managersshould invest only in projects that generate returns in excess of WACC

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Q&A (2)

Q: Do you agree with Joanna Cohens WACC calculation? Why or why not?

A: We do not agree with Joanna Cohens WACC calculation.

She uses the historical data in estimating the cost of debt. She divided theinterest expenses by the average balance of debt to get 4.3% of before tax cost ofdebt. It may not reflect Nikes current or future cost of debt.

She uses book values as the basis for debt and equity weights; the market valuesshould be used in calculating weights. The reason of using market weights toestimate WACC is that it is how much it will cause the firm to raise capital today.

That cost is approximated by the market value of capital, not by the book value ofcapital.

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Q&A (3)

Q: If you do not agree with Joannas analysis, calculate your own WACC for Nike andbe ready to justify your assumptions

A: Assumptions:

For market value of equity, $42.09*273.3 mn shares = 11,503 mn.

Due to the lack of information of the market value of debt, book value of debt,1,291 mn, is used to calculate weights.

Thus, the market value weight for equity is 11,503 / (11,503+1,291) = 89.9%; theweight for debt is 10.1%.

WACC = Wd*Kd(1-T) + WeKe

= 4.44%*0.101 + 9.81%*0.899

= 9.27%

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Q&A (4)

Q: Calculate the costs of equity using CAPM, the Dividend Discount Model and theEarnings Capitalization Ratio. What are the advantages and disadvantages of eachmethod?

A:

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CAPMDividend

Discount Model

EarningsCapitalization

Ratio

Cost of Equity 9,81% 6,64% 9,88%


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Q&A (4)

Q: Calculate the costs of equity using CAPM, the Dividend Discount Model and theEarnings Capitalization Ratio. What are the advantages and disadvantages of eachmethod?

A:

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Methode Advantages Disadvantages

CAPM More accurate as it is calculatedby adding financial, investmentand operational risk.

Difficult to determine cost ofcommon stock equitybecause it use book value

Dividen Discount Model Risks not included Easier to adjust because ofusing market value

Earnings CapitalizationRatio

Risks not included Difficult to determine cost ofcommon stock equitybecause it use book value


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Q&A (5)

Q: What should Kimi Ford recommend regarding an investment in Nike?

A: Kimi Ford should not recomended to buy Nikes stock because the stock isovervalue. What Kimi Ford can do is wait for a better buy period when this stock

is trading closer to the proper value. She should keep a close eye on the companybecause Nike Inc. has growth potential that would be beneficial to the fund.Along with this fact, management has goals for the near future that could providea great deal of profit for Nike Inc.

Kimi Ford used a discount rate of 10.1 percent to find a share price of $36.14. Thismakes Nike Inc. share price overvalued by $5.95 as Nike is currently trading at$42.09. We already established that we found this discount rate to not reflect thetrue market value and solved for a discount rate that would be more accurate. Wefound the weighted average cost of capital by using CAPM, finding a discount rateof 9.8765 percent. This discount rate results in a share price of $36.49, meaningthat Nike Inc. is overvalued by $5.60 per share.

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THANK YOU

THANK YOU

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nike sindikat 2

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