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Case Preparation Chart Nike

In: Business and Management

Submitted By tokio888hotel
Words 677
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Case Preparation Chart

Facts & Issues:

Kimi Ford was the portfolio manager in NorthPoint Group, who was concerned about whether or not to add Nike, Inc. shares into her fund

Analysts had different opinion about the company prospects; Lehman Brothers suggested a strong buy while UBS and CSFB recommended a hold. She asked her assistant, Joanna Cohen, to calculate the company’s cost of capital precisely. On the report, Joanna Cohen used weighted average cost of capital (WACC) to calculate the cost of capital.

The main issue of this case is the estimation of cost of capital, why it is important in the business world.

Missing Information / Assumptions:

I think this case provides enough information for using different approaches to estimate WACC.

Analysis of Facts:

I do not completely agree with Joanna Cohen’s calculation of WACC. There are several problems in her calculation: • Instead of using market value of debt and equity to estimate the cost of capital, she used the book value. While the book value of debt is accepted as an estimate of market value, book value of equity should not be used when calculating cost of capital. • Another problem is the estimation of cost of debt. Cohen calculated it by taking total interest expense for the year 2001, dividing it by the company’s average debt balance and then adjusting the rate for taxes. These historical data would not reflect Nike’s current or future cost of debt

Alternatives:

The WACC requires the determination of the cost of equity and it can be calculated using several different accepted methods. There is the Capital Asset Pricing Model (CAPM), the Dividend Discount Model and the Earning Capitalization Ration.

Decision Criteria:

Comparing the three methods, I found advantages and disadvantages of each approach: • The Dividend Discount Model is a simple model for valuing…...

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