Case 14 Nike: Cost of Capital Essay

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Pages: 5

Nike, Inc.: Cost of Capital
Case 14

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Date Submitted
September 28, 2011

This case highlights Kimi Ford, a portfolio manager with NorthPoint Group, a mutual-fund management firm. She managed the NorthPoint Large-Cap Fund, and in July of 2001, was looking at the possibility of taking a position in Nike for her fund. Nike stock had declined significantly over the previous year, and it appeared to be a sound value play. Nike had held an analysts’ meeting one week earlier to release the company’s fiscal results for 2001. Apparently Nike had an ulterior motive; the management wanted this opportunity not only to release their fiscal
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Therefore she justifies labeling all of the segments as having the same risk. While this is probably a safe assumption, I believe that multiple costs of capital might be used for one main reason. The majority of Nike’s products are sports-related, but they are not all related to the athlete’s performance. The footwear that an athlete uses is typically chosen for some sort of performance enhancing quality. Basketballs shoes have more ankle support and technology to increase the athlete’s jumping skills. Football and soccer shoes are more focused on enhancing traction. Apparel such as socks, jerseys, and track suits are not known to have an effect on the athletic performance itself. It is possible that this difference in the products justifies different risk rates for the various business segments.
Using the WACC is an accurate method of estimating a firm’s cost of capital. Seeing as Ms. Ford and her assistant did not know Nike’s target capital structure, basing the capital structure on the current capital components of 27% debt and 73% equity is acceptable. The methodology is sound.
Cost of Debt
The assistant estimates the cost of debt based on the interest expense for the year 2001and Nike’s average debt balance. I believe this assumption to be flawed. The cost of debt should