Part of Nike's strategy to revitalize the company was aimed at addressing their revenues which had been fixed for four years and their net income which had fallen to almost $220M. Additionally, Nike had been losing overall market share and the strong dollar had adversely affected revenue. To address those issues, management was planning to; (1) raise revenue by developing increased levels of athletic-shoe products in the mid-priced segment. (2) Push its well performing apparel line, and (3), control expenses.
Kimi Ford, a portfolio manager at a mutual fund management firm, was considering adding Nike's shares to the portfolio she managed. To come to a decision she asked Joanna Cohen, her assistant, to develop a discounted cash flow forecast. Her analysis had a few flaws that will be pointed out in this paper through a new analysis.
Cohen's first mistake was to use Nike's book value of equity in her calculation of the WACC; $3,494.50.
English: Metropolitan Life Bldg., Manhattan, New Y...
WACC (AM)
Nike ControlThough the book value is an accepted estimate of the debt value, the equity's book value is an inaccurate measure of the value perceived by the shareholders, therefore an irrelevant source when finding the equity value. Moreover, Nike is a public traded firm, therefore its equity value can be best reflected by its market value.
Market Value of Equity = Market price of the share * Number of Shares Outstanding
= $42.09* 271.5 = $11,427.44
Book Value of debt = Current portion of long term debt + Notes payable
= $855.3 + $435.9 = $1,291.2
E / (D+E) = $11,427.44 / ($11,427.44 + $1,291.2) = 0.89847 which is 90% of total capital
D / (D+E) = $1,291.2 / ($11,427.44 + $1,291.2) = 0.1015 which is 10% of total capital
D + E = $12,718.635 million
There is an enormous difference between the book value of...