Nike Inc.

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NorthPoint Large-Cap Fund, from the NorthPoint Group, invests mostly in Fortune 500 companies with an emphasis on value investing. Generally it invests in old-economy stocks and it has been doing really well in the past year of 2000 (return of 20.7% even as the S&P 500 fell 10.1%). Kimi Ford, a portfolio manager at NorthPoint Group is considering buying some shares for the fund, a week before she began her research Nike Inc. decided to host an analysts’ meeting to show their 2001 fiscal results.
However this meeting had another purpose other than just providing information about their fiscal results, the meeting was also to communicate a new strategy to revitalize the company by developing more athletic-shoe products at a mid-price range. During the meeting, the company’s representatives stated that Nike’s revenues since 1997 have been around 9 billion dollars and net income had fallen in 2000, 220 million dollars. Nike´s executives believed that with this new strategy, the company would have a revenue-growth targets of 8% to 10% and earnings-growth target above 15%.
With this information provided by the company, Ford then decided to look at some reports regarding the meeting, provided by Lehman Brothers that recommended a strong buy while UBS Warburg and CSFB recommended a hold. Since she could not get any conclusive conclusions from these reports, Ford decided to ask her assistant Joanna Cohen to estimate and weight Nike´s cost of capital in order to make a better decision and get some more accurate conclusions.


In order to make a better analysis of the situation, I´m going to state some important financial factors to take into consideration and what was already being addressed by the Joanna:
Since app...

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...9 (MRP) = 10.5%
So now it is possible to calculate the WACC of Nike Inc. using both weights and costs of debt and equity:
Weight debt x Cost Debt + Weight equity x Cost Equity
0.4682% + 9.4083% = 9.88%
With the WACC that are the rate of return required for cash flows with similar to the whole firm. Investment on Nike Inc. projects will generate positive returns of the WACC because the WACC found is positive.


Taking into consideration that WACC is, in my opinion the most suitable model to make a final decision, I find that the shares at a current price with a WACC are higher than 42.09% (current price of the share), Ford should invest in Nike Inc. and buy it now. Even though the share price has been declining, the determination that Nike´s management is putting into this new strategy seems to be really high and with a high probability of success.
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