Nike Cost of Capital Case
Introduction and Background
Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. In July 2001, Ford considered buying shares of Nike, Inc., the well-known athletic shoe manufacturer. It would be prudent of Ford to base her assessment on Nike’s financial reports for 2001. Around the same time, Nike held an analysts’ meeting to disclose those financial results. They also addressed ways to revitalize the company, since share price was beginning to decline and revenues had plateaued at around $9 billion. Although Nike projected a rosy future, many analysts had mixed reactions to the projections. Ford was right to come up with her own forecast, seeing as the reactions ranged from too aggressive to growth opportunities. In order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital.
The WACC is extremely relevant to a company’s capital budgeting team and other capital finance department members. WACC is extremely useful in determining whether or not to accept a capital project. If a proposed capital project produces a rate of return higher than the company’s WACC, that project should be accepted. If the project’s rate of return is lower than the WACC, it should be rejected. As mentioned before, the optimal capital structure produces the lowest WACC. Thus, WACC is
Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. In July 2001, Ford considered buying shares of Nike, Inc., the well-known athletic shoe manufacturer. It would be prudent of Ford to base her assessment on Nike’s financial reports for 2001. Around the same time, Nike held an analysts’ meeting to disclose those financial results. They also addressed ways to revitalize the company, since share price was beginning to decline and revenues had plateaued at around $9 billion. Although Nike projected a rosy future, many analysts had mixed reactions to the projections. Ford was right to come up with her own forecast, seeing as the reactions ranged from too aggressive to growth opportunities. In order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital.
The WACC is extremely relevant to a company’s capital budgeting team and other capital finance department members. WACC is extremely useful in determining whether or not to accept a capital project. If a proposed capital project produces a rate of return higher than the company’s WACC, that project should be accepted. If the project’s rate of return is lower than the WACC, it should be rejected. As mentioned before, the optimal capital structure produces the lowest WACC. Thus, WACC is