contradicted to Ford’s cost of capital of 12%. This report points out flaws of Cohen’s assumption and recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation‚ we will use CAPM‚ the dividend discount model (DDM)‚ and the earnings capitalization model (ECM) to see the different in each and suggest the most suitable one. To sum it up‚ Ford is suggested to add Nike’s shares to its portfolio. Cohen’s Flaws According to the Cohen’s exhibits‚ there are 2 main
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changes the WACC calculation along with the different value for the cost of debt. The CAPM model is a valuable tool used in the estimation of cost of equity but as with many models‚ there are advantages and disadvantages. The advantages to this model are inherent to its portfolio management principles. The CAPM only considers systematic risk which can be realized in diversified portfolios. A disadvantage of the CAPM can be the difficulting of finding the equity risk premium and the timely beta of
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of the three methods – CAPM‚ DDM‚ or ECM -- is best for calculating the cost of equity? We can see that the three different methods of calculating the cost of equity produced widely varied estimates. In such situations the financial analyst has to use his/her judgment as to relative merits of each estimate and then choose the estimate which seemed more reasonable under the circumstances. Comparing the already discussed methods‚ we found that the main advantage of CAPM approach is that it takes
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analysis‚ we examine why WACC is important in decision making and we show how WACC for Nike Inc. is calculated correctly. Also‚ we calculate the company’s cost of equity using three different models: the Capital Asset Pricing Model (CAPM)‚ the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price)‚ we analyze their advantages and disadvantages and finally we conclude whether or not an investment in Nike is recommended. Our analysis suggests that Nike Inc.’s common stock should
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CASE 14 NIKE‚ INC.: COST OF CAPITAL Cost of capital denotes the opportunity cost of using capital for a particular investment as oppose to the alternative investment which has similar systematic risk. It is extremely important since it is used in evaluating whether a project is feasible or not in the net present value (NPV) analysis‚ or in assessing the value of an asset. WACC (weighted average cost of capital) is the proportional average of each category of capital inside a firm (common
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I. Introduction Kimi Ford‚ a portfolio manager for the mutual-fund management group NorthPoint‚ was reviewing the financials of Nike Inc. to consider buying shares for the NorthPoint Large-Cap Fund that she managed. A week prior‚ Nike Inc. held an analysts’ meeting to share their 2001 fiscal results and develop a strategy to revitalize the company. II. Background of Firm Nike’s revenues since 1997 had grown from $9 billion‚ while net income had fallen $220 million. A study written by Douglas
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of capital for Nike‚ while Cohen’s estimation identifies a past cost of debt‚ ours reflects current and future figures better. Cost of Equity: There are total three methods to evaluate Cost of equity‚ Dividend discount model (DDM Model)‚ Capital assets pricing model (CAPM Model) and the Earnings Capitalization Model (EPS/ Price). The dividend discount model
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Nike Inc. Cost of Captial Michael Tjandra Anna Ellie Du Background of Nike and North - Point Nike North-Point Revenue $9 Billion from 1997 Mutual Fund Management Firm Net income fallen from $800 Million to $580 Million Invests in fortune 500 companies Market Share fallen from 48% (1997) to 42% (2000) At end of June 2001‚ fund’s year to date returns tops at 6.4% Long term revenue targeted at 8-10% Funds performed extremely well Earning growth is targeted at 15% The stock market in decline
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and the market value was $421.88 so she overstated debt by $19.42 (Exhibit 6). To find Nike’s cost of debt‚ we used three different methods: the Capital Asset Pricing Model (CAPM) (Exhibit 7)‚ the Dividend Discount Model (DDM) (Exhibit 5)‚ and the Earnings Capitalization Model (ECM) (Exhibit 8). We decided that the CAPM gave us the most accurate estimate of Nike’s cost of debt‚ and we used that in arriving at our before-tax cost of debt of 7.173% and our final after-tax cost of debt of 4.447% (Exhibit
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1.0 Summary of case study NorthPoint Group is a mutual fund management firm which invested mostly in Fortune 500 companies. Its top holding included ExxonMobil‚ General Motors‚ McDonald’s‚ 3M and other large cap. NorthPoint Group performed extremely well although the stock market had declined over 18 months. In 2000‚ it earned a return of 20.7% while the S&P 500 fell 10.1%. At June 2001‚ NorthPoint Group’s return stood at 6.4% while the S&P 500 stood at -7.3%. Nike‚ Inc. is an American multinational
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