Introduction:
This case is mainly dealing with a well-known company Nike Inc. The company is dealing in different segments which are very much similar with respect to their revenue generation. Nike is the manufacturer of branded athletic shoes which are famous around the world for their quality and brand name.The issues Nike faced were of fluctuations in the share prices which were following a downtrend.
A mutual fund management company was of the opinion to invest in Nike Inc. through equity financing and Nike’s performance was evaluated by the Portfolio Manager Ms. Kimi Ford on June 1, 2001, for North Point group. She came to know that the performance of the company was on a declining position so she had to take the decision whether to invest in Nike or not? She analyzed the performance through revenues, net profit, market share and Nike’s targets for future growth in terms of revenues and earnings.
Performance Evaluation:
The performance of the company was evaluated by analyzing the financial statements of the last 7 years from 1995 to 2001 which resulted in a double revenue growth from 4760 million dollars to 9489 million dollars whereas, there were fluctuations in the earning structure of the company.The earning structure was the highest in 1997 and later on it went down to 400 million dollars from 796 million dollars. The capital structure of the company shows that it is focusing more onequity financing as compared to debt financing.
Nike Inc. cost of capital Harvard Case Solution & Analysis
Valuation of Nike Inc. has been made by the portfolio manager of Mutual Fund Management Company by using the two approaches which are widely used. The approaches arediscounted cash flow method and sensitivity analysis. Discounted cash flow method shows that the company is following an inconsistent revenue growth rate of 7% which will be reduced to 6% within a 10-year forecasting period from 2001 to 2011.
The enterprise value calculated by the manager is around 11,415 million dollars.This value is used for calculating the equity value per share which is around 37.27 dollars per share and is lower than the current market price of company’s share i.e. $42.09. So, it shows that the company’s stock is overvalued and it provides the investors the indication of decline in the share price of company’s stock in near future.
Moreover, the discount rates were estimated by using the sensitivity analysis which resulted in an equity value of around 37.27 dollars at 12% discount. So, it was analyzed further to calculate cost of capital to get better results, and it seemed to be a higher rate which needs to be evaluated further to get the proper valuation through different fundamental models.
Weighted Average Cost of Capital (WACC):
WACC is also known as cost of capital which is considered as the opportunity cost of getting return for any project. It consists of taking average of the debt financing returns and return of equity along with the return of preferred stock.It is the minimum return required to cover the investment.............
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