1. In the first half of this case, the portfolio manager, Kimi Ford, has already performed the Discounted Cash Flow analysis herself, and arrived at an equity value per share of $37.27. What is the cost of capital that she uses to get this stock price? 2. Kimi Ford then asks her assistant, Joanna Cohen, to estimate Nikes cost of capital, a single number in the DCF analysis. Why is this number so crucial in corporate valuation?

3. To estimate the cost of capital, the finance industry looks at cost of debt (rd), cost of equity (re), and the weights of debt and equity (D% and E%), i.e., Weighted Average Cost of Capital. Lets first look at the weights. Assume that the book value of debt is a close proxy for the market value of debt (this is actually a result of Question 8). What is the book value (Year of 2001) of shareholders equity? What is D% and E%? What is the current market value of shareholders equity? What is D% and E%?

You can find the case from online if you need more information or excel spreadsheet. Thank you.

CASE 15 Nike, Inc.: Cost of Capital On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analysts write-ups of Nike, Inc., the athletic-shoc man- ufacturer, Nike's share price hac leclinel significantly from the heginning of the year, Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune companies, with an emphasis on value investing. Its top holdings included ExxonMobil. General Motors, McDonald's 3M, and other large-cap, generally old-cconomy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed cxtrcmcly well. In 2000, the fund carned a return of 20.7%, cvcn as the S&P 500 fell 10.1%.. Al the end of June 2001, the curul's year-to-date returns stock at 6.4% versus -7.3% for the S&P 500. Only a week carlier, on June 28, 2001, Nike had held an analysts' meeting to dis- close its fiscal-year 2001 results.' The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues bud plateauet at arcurul S9 billion, while nel income haud fallen from almost 5800 million to $580 million (see Exhibit 1). Nike's market share in U.S. athletic shoes had fallen from 48%, in 1997, to 42% in 2000. In addition, recent supply-chain issues and the adverse effe ollar had negatively affected revenue At the meeting, management revealed plans to ankless both top-line growth and operating perfomance. To boost revenue, the company would devclop more athletic- shoe products in the midpriced segment segment that Nike haul overlooked in recent years. Nike also planned to push ils apparel line, which, under the receril lealership of of a strong 'Nike's Tiscal year endel in May. Douglas Robson, Imst. Something: Nike's insulatily are Fool Dryging Have Hi Rumming in Place." Business Week, (2 July 2001). Sneakers in this segment sold for S70-$90 a pair. 236 Part Three Listimating the Cost of Capitul industry veteran Mindy Grossman.' had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, company executives reiter- ated their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15% Analysts' reactions were mixed. Some thought the financial targets were too aggressive; others saw significant growth opportunities in apparel and in Nike's inter- mational businesses, Kimi Ford read all the analysts' reports that she could find about the June 28 mecting, but the reports gave her no clear guidance: a Lehman Brothers report rec- ommended a strong buy, while UBS Warburg and CSFB analysts expressed misgiv- ings about the company and recommended a hold. Ford decided instead to develop her own discounted cash flow forecast to come to a clearer conclusion. Her forecast showed that, at a discount rate of 129, Nike was overvalued at its current share price of $42.09 Exhibit 2). However, she had donc a quick sensitivity analysis that revealed Nike was undervalued at klisccunl rates below 11,17%. Because she was about to go into a meeting, she asked her new assistant, Joanna Cohen, to estimate Nike's cost of capital. Cohen immediately gathered all the data she thought she might need (Exhibits 1 through 4) and began to work on her analysis. At the end of the day. Cohen submit- led her cost-of-capital estimate and a memo (Exhibit 5) explaining her assumptions to Ford Mindy Grossman joined Nike in September 2000. She was the former president and chict cxecutive of Jones Apparel Group's Polo Jeans division. CASE 15 Nike, Inc.: Cost of Capital On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analysts write-ups of Nike, Inc., the athletic-shoc man- ufacturer, Nike's share price hac leclinel significantly from the heginning of the year, Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune companies, with an emphasis on value investing. Its top holdings included ExxonMobil. General Motors, McDonald's 3M, and other large-cap, generally old-cconomy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed cxtrcmcly well. In 2000, the fund carned a return of 20.7%, cvcn as the S&P 500 fell 10.1%.. Al the end of June 2001, the curul's year-to-date returns stock at 6.4% versus -7.3% for the S&P 500. Only a week carlier, on June 28, 2001, Nike had held an analysts' meeting to dis- close its fiscal-year 2001 results.' The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues bud plateauet at arcurul S9 billion, while nel income haud fallen from almost 5800 million to $580 million (see Exhibit 1). Nike's market share in U.S. athletic shoes had fallen from 48%, in 1997, to 42% in 2000. In addition, recent supply-chain issues and the adverse effe ollar had negatively affected revenue At the meeting, management revealed plans to ankless both top-line growth and operating perfomance. To boost revenue, the company would devclop more athletic- shoe products in the midpriced segment segment that Nike haul overlooked in recent years. Nike also planned to push ils apparel line, which, under the receril lealership of of a strong 'Nike's Tiscal year endel in May. Douglas Robson, Imst. Something: Nike's insulatily are Fool Dryging Have Hi Rumming in Place." Business Week, (2 July 2001). Sneakers in this segment sold for S70-$90 a pair. 236 Part Three Listimating the Cost of Capitul industry veteran Mindy Grossman.' had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, company executives reiter- ated their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15% Analysts' reactions were mixed. Some thought the financial targets were too aggressive; others saw significant growth opportunities in apparel and in Nike's inter- mational businesses, Kimi Ford read all the analysts' reports that she could find about the June 28 mecting, but the reports gave her no clear guidance: a Lehman Brothers report rec- ommended a strong buy, while UBS Warburg and CSFB analysts expressed misgiv- ings about the company and recommended a hold. Ford decided instead to develop her own discounted cash flow forecast to come to a clearer conclusion. Her forecast showed that, at a discount rate of 129, Nike was overvalued at its current share price of $42.09 Exhibit 2). However, she had donc a quick sensitivity analysis that revealed Nike was undervalued at klisccunl rates below 11,17%. Because she was about to go into a meeting, she asked her new assistant, Joanna Cohen, to estimate Nike's cost of capital. Cohen immediately gathered all the data she thought she might need (Exhibits 1 through 4) and began to work on her analysis. At the end of the day. Cohen submit- led her cost-of-capital estimate and a memo (Exhibit 5) explaining her assumptions to Ford Mindy Grossman joined Nike in September 2000. She was the former president and chict cxecutive of Jones Apparel Group's Polo Jeans division