F I N A N C E

NIKE, INC. : COST OF CAPITAL

Azwimar Putranusa29114335Anugrah Tri Padma29114397Syachriani Syam29114384Anindya Prawita Sari29114337

YP 52 B

SCHOOL OF BUSINESS AND MANAGEMENTMASTER OF BUSINESS ADMINISTRATIONINSTITUT TEKNOLOGI BANDUNG2015BackgroundKimi 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. The Performance of Nike for Several Years

Since 1997Revenue$ 9 billion

Net incomeFallen $ 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 = $ 42.09Number of Share Outstanding= $ 273.3Value 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= $ 435.9Value of Debt (D)= Long Term Debt= $ 435.9

Weight of Debt (WD)Given :Value of Debt (D)= 435.9Value of Equity (E)= 11503.197Weight 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)= 11503.197Value of Debt (D)= 435.9Weight of Equity (WE)= E/(D+E)= 11503.197 / (435.9 + 11503.197)= 0.9635= 96.35%

Cost of Debt Before Tax (rd)

I= Annual interest in dollars Nd= Net proceeds from the sale of debtn= Number of years to the bonds maturity

Given :I= 6.75% : 2= 3.375 % = 0.03375

Nd= $ 95,60n= 20 years x 2 (because of semi annually)= 40

Cost of Debt After Tax ( ri)

Where :ri= after tax cost of debtrd= before tax cost of debtT= tax rate

Given :rd= 0.041335T= 38%

Cost of Equity (Ke)Cost of Equity = Rf + [b x Rm]Where :Rf= Risk free rateb= betaRm= Risk premium

Given :Rf= 3.59 %b= 0.690Rm= 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 CapitalDataWeightCostWeighted Cost

Long Term Debt$435.90.10122.56277%0.259 %

Equity$11503.1970.89877.661%6.8849%

Total$11939.09799.99%WACC7.144%

ConclusionFor the conclusion of the Nike, inc. : Cost Of Capital, We get a new WACC = 7.144%, its lower than Joanna Cohens calculation of WACC = 8.4%. With the total of weight of debt/equity = 99.99% and for the total data of Long term debt and equity = $ 11939.097.

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

SuggestionSuggestion that we can be given for this case is not to buy shares Nike because fair value is below than market price. From the calculation and analysis, then Kimi Ford has not to buy Nike stock. This is because not secure enough stock nike, nike quite dramatic development than any other company in the industry. But, stock nike potential. Nike shares as a long-term investment is always beautiful, but also buy a short time to be careful because of the rapid changes of the industry, changes in Nike, changing trends in the footwear industry, and so on. In addition, Ford Kimi Also do not forget to monitor the activities very closely.