Case TRX - IPO
Financial Engineering
Case Study Written Report
NIKE INC., COST OF CAPITAL
CASE REPORT
Submitted to: Mr. Mieczyslaw Grudzinski
Report date: 27 February 2014
BBA Finance & Accounting
Semester 6, Academic year 2013-2014
Group Member:
Tra My Nguyen 24458
Anna Kulishova 24444
Kaihao Zhang 25545
Zakariae Mokhliss 27727
NIKE INC., COST OF CAPITAL
CASE REPORT
INTRODUCTION
Our group was assigned to produce a report on the Nike Inc.: Cost of Capital case study as a component of Financial Engineering assignments. This case study presented a situation where Ms Kimi Ford, a portfolio manager at North Point Group, was considering buying some shares of Nike Inc. for the fund that she was managing. The reason was, after a quick sensitivity analysis of the discounted cash flow forecast, that she learned that Nike was undervalued at discount rates below 11.17%, which would make it beneficial to acquire its shares. In order to make a decision whether to buy Nike’s shares, she needed the estimation of Nike’s cost of capital. Her assistant, Ms Joanna Cohen, performed an estimation of the cost of capital by the end of the day with a result of 8.4%. Our task was to verify whether her estimation was correct and suggest our own proposal of changes.
CASE ANALYSIS
What our group agrees on with Ms Cohen’s approach is the choice of WACC – Weighted Average Cost of Capital. WACC is one of the most widely used estimation of a firm’s cost of capital, with each and every source of capital proportionally weighted. A firm is generally financed by debt and equity, therefore, the equation to calculate WACC is as follows:
Where:
- book value of the firm’s debt
- book value of the firm’s equity - value of the firm’s financing
- cost of debt
- cost of equity
- Corporate tax
In terms of investment decision, WACC reflects the minimum rate of return required for the investment to break even. WACC is very often
Case Study Written Report
NIKE INC., COST OF CAPITAL
CASE REPORT
Submitted to: Mr. Mieczyslaw Grudzinski
Report date: 27 February 2014
BBA Finance & Accounting
Semester 6, Academic year 2013-2014
Group Member:
Tra My Nguyen 24458
Anna Kulishova 24444
Kaihao Zhang 25545
Zakariae Mokhliss 27727
NIKE INC., COST OF CAPITAL
CASE REPORT
INTRODUCTION
Our group was assigned to produce a report on the Nike Inc.: Cost of Capital case study as a component of Financial Engineering assignments. This case study presented a situation where Ms Kimi Ford, a portfolio manager at North Point Group, was considering buying some shares of Nike Inc. for the fund that she was managing. The reason was, after a quick sensitivity analysis of the discounted cash flow forecast, that she learned that Nike was undervalued at discount rates below 11.17%, which would make it beneficial to acquire its shares. In order to make a decision whether to buy Nike’s shares, she needed the estimation of Nike’s cost of capital. Her assistant, Ms Joanna Cohen, performed an estimation of the cost of capital by the end of the day with a result of 8.4%. Our task was to verify whether her estimation was correct and suggest our own proposal of changes.
CASE ANALYSIS
What our group agrees on with Ms Cohen’s approach is the choice of WACC – Weighted Average Cost of Capital. WACC is one of the most widely used estimation of a firm’s cost of capital, with each and every source of capital proportionally weighted. A firm is generally financed by debt and equity, therefore, the equation to calculate WACC is as follows:
Where:
- book value of the firm’s debt
- book value of the firm’s equity - value of the firm’s financing
- cost of debt
- cost of equity
- Corporate tax
In terms of investment decision, WACC reflects the minimum rate of return required for the investment to break even. WACC is very often