What should Kimi Ford recommend regarding an investment in Nike? Based upon the information available to us we reached the following conclusions: Since non-Nike brands accounted for only 4.5% of Nike’s total revenue and the only non-sports related business segment was their Cole Haan line it was very likely that all of the various business segments faced the same risk factors. Therefore rather than compute multiple costs of capital we thought that it would be appropriate to use to a single cost of capital for the entire company.
Since Nike utilizes two capital components, debt and equity, we calculated their cost of capital using the after-tax WACC method (based upon financial figures available) which gave us the following results: Capital Structure Debt: 3.67% Equity: 96.33% Market Value (in millions) Debt: 435.9 Equity: 11,427.4 Component Costs of Capital Debt: 7.17% Equity: 6.29% Taking these component costs into account, along with all of the additional relevant numbers available to us we calculated Nike’s after-tax WACC to be 6.23%.
We would strongly recommend, that based upon the analysis by Ms. Ford in which she concluded that Nike is undervalued at discount rates below 11.17%, Ms. Ford immediately invest a substantial amount of the NorthPoint Large-Cap Fund in Nike, Inc. since it is a definite value investment with its discount rate of 6.23%. What should Kimi Ford recommend regarding an investment in Nike? As per Kimi Ford’s forecast, at the current share price of $42.09 Nike is over-valued at a discount rate of 12% and under-valued at discount rate below 11.2%.
The weighted average cost of capital (WACC) by using CAPM was found out to be 9.85%. This discount rate is less than the 11.2% which implies that the Nike share is under-valued at $42.09. Hence, based on this forecast, Nike Inc. should be added to the North Point Large-Cap Fund at this time because the stock is undervalued. Therefore, at this point in time we recommend a buy decision for Nike Inc. Recommendation: Kimi Ford used a discount rate of 8.4 percent to find a share price of $63.50.
This makes Nike Inc. share price undervalued by $21.41 as Nike is currently trading at $42.09. We already established that we found this discount rate to not reflect the true market value and solved for a discount rate that would be more accurate. We found the weighted average cost of capital by using CAPM, finding a discount rate of 9.8767 percent. This discount rate results in a share price of $56.81, meaning that Nike Inc. is undervalued by $14.72 per share.
Using this data, we found that Nike Inc. should be added to the NorthPoint Large-Cap Fund at this time because the stock is undervalued. Therefore at this point in time we recommend a buy decision for Nike Inc. as it has growth potential that would be beneficial to the fund. Along with this fact, management has goals for the near future that could provide a great deal of profit for Nike Inc. All of the plans laid out at the executive meeting display that the company is heading on the recovery path and there is potential for abnormal profits given the growth capacity that Nike has got as elaborated by ratio analysis.
In addition to the above Ratio analysis of the performance of the company has shown a strong potential in the performance of the company since all the ratios are favorable for a better performance. And the set targets by the management are easily achieved if they stay focused since they have the capacity. Technical analysis also supports a buy decision, because looking on the past performance of the Nike Inc. share against the market index.
It has shown that Nike can outperform the market returns and now that it had gown down, it is left with the upside given plans that are being put in place. Once more we reiterate the decision to buy for Nike Inc and monitor its activities very closely.
