A Case Brief Submitted to
In Partial Fulfillment of the Requirements for
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 …show more content…
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