Nike Cost of Capital Case Study Help
Kimi Ford – NorthPoint is a large cap fund manager, who is considering to buy Nike’s stock and is also concerned regarding the decision that Nike’s stock should be purchased or not. However, the sluggish sales of the company and the severe decline in the market share as well as its profits on account of the supply chain issues, made Kim Ford think twice before making the final decision of buying Nike’s stock. A meetingis held with core considerationover looking at different strategies thatNike could employ to boost its sales through having additional exposure in the apparel lines as well as in mid-price footwear, and exerting more efforts in reducing itsexpenditures. A discounted cash flow forecast was created by Kim and Joanna Cohen was asked to estimate the weighted average cost of capital. The issue with the Nike’s case is to assess and control the calculation of the weighted average cost of capital done by Joanna Cohen – the assistant of the portfolio manager at the NorthPoint Group. The case sets out to examine and find mistakes in the calculation of the cost of capital. The case stresses over the significance of weighing the company’s stock before buying them, with the use of the valuation model i.e. WACC.
Estimation of WACC by Cohen
The weighted average cost of capital provides a solid foundation of assessing how much it would cost the company to raise the funds to finance its new projects. The calculation of the WACC allows the company and the investors to determine the acceptable returns for the project. I agree with various elements about Cohen’s calculation. I agree with the assertion that the apparel and footwear line of Nike share similar risks to warrant one cost of capital calculation. I also agree that different risks were faced by Cole in a different industry, but as it represents the small fraction of the total amount of revenues; there is no need ofcalculating the individual cost of capital. I agree with the use of 38 percent tax rate, which was calculated by adding 35 percent US statutory rate and average of Nike’s states taxes………………………………..
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