An answer to an investment analysis case study nike

Valuation of Nike Inc. The approaches arediscounted cash flow method and sensitivity analysis.

An answer to an investment analysis case study nike

Cost of Capital The cost of capital can be thought of as the minimum return required by providers of finance for investing in an asset, whether that is a project, a business unit or an entire company.

It needs to reflect the capital structure used to finance the investment Cornelius, For companies which raise funds from multiply sources such as bank loans, share issues, venture capitals and so on, an appropriately estimate cost of capital is extremely important.

On the one hand, the cost of capital is used as a discount rate to appraise new investments for a company, whether net present value NPV approach or internal rate of return IRR approach is applied. Similarly in IRR approach, a rate of return larger than the cost of capital is usually required.

Finally, the cost of capital not only reflects the capital structure of a certain investment, but also represents the opportunity cost of an investment. To calculate the cost of capital for a company, the weighted average cost of capital WACC is widely used and accepted generally.

Basically, several figures are needed in calculating WACC. Firstly, the weight of debt KD and the weight of equity WE are required. Secondly, the cost of debt KD and the cost of equity KE are required. Detailed figures and methods used to calculate KD and KE will explain later.

The first mistake comes to the book value of equity used in calculating WD. So, the market value of equity should be used instead of book value.

Then, Cohen calculates the cost of debt by taking total interest expense for the year and dividing it by the company's average debt balance. In WACC calculation, marginal tax rate should be used as a corporate tax rate for the future estimate. Practically, if a company has a lower average effective tax rate which are generated from the average of past years actual taxes paid divided by earnings before taxes than the marginal tax rate, this will be more preferable.

Finally, although the year yields on U. Concerning on the mistakes Cohen had made in her calculation, the recalculations are as follow.

For debt, book value will be used while the market value of debt cannot be found in this case, in fact, debt is not so changeable as the share prices. Therefore, the weight of equity WE is Finally, Cohen decided to use single cost of capital due to different products are sold through the same marketing and distribution channels and are often marketed in other collections of similar designs.

In my opinion, as Nike produces and sells my different types of products, multiply costs of equity should be used. However, since this case does not give out sufficient data, I can only use single cost of equity.

An answer to an investment analysis case study nike

To find the cost of equity, there are many methods can be adopted. Meanwhile, the Dividend Growth Model, which was originally published in by Gordon, will also be considered as a way to do comparison. Applying to the case, the 3-month to 1 year yield on government debt 3.

Km-Krf is equity risk premium, as the frequent change occurred in Km and Krfthe average value can be used in order to smooth out this volatility.

For beta, the beta coefficient of the market model has gained wide acceptance as a relevant measure of risk in portfolio and security analysis Klemkosky and Martin, Generally, two kinds of betas existed in real world.

To better reflect the future risk, the most recent beta 0. Therefore, the final KE equals to 8. Apparently, the cost of equity calculated under two models differed significantly from each other, for which the reasons are that different models are based on different assumptions and different models take different factors into account.

On the one hand, the CAPM based a series of unrealistic assumption and may lead to inaccuracy. Firstly, due to the frequently changing in stock market, the return on market is not stable, so the equity risk premium Km-Krf is hard to accurately find.

Secondly, although CAPM takes risk factor into account by using beta to adjust the return premium, the beta is not always constant, from where additionally incurs inaccuracy. On the other hand, DGM simply use dividend growth rate and share price to calculate the cost of equity, not risk factors are taken into account.

As a matter of fact, market risk both systematic risk and unsystematic risk will rise the cost, which explains why the figure calculated above using DGM is significantly lower than the result under CAPM. Additionally, if the cost of equity generated by DGM is used to predict the share price under the same model, this circular reasoning does not have and predictable value.

Firstly, CAPM considers only systematic risk rather than the stock market as a whole, as unsystematic risk could be eliminated by diversified portfolio investments.

Secondly, CAPM generates a theoretically-derived relationship between required return and systematic risk, which is more measurable than the dividend growth rate used in DGM. Besides, studies have shown that the estimates of expected return derived from a dividend discount model are substantially lower than historical average return Fama and French, As the WACC formula given and related figures discussed and calculated above, although the weight of debt and the weight of equity financed for a certain project are set by investors, the cost of them are not stable.

For instance, the cost of debt is influenced by the bank loan policy and the floating rate of bonds while the cost of equity is influenced by fluctuate Treasury bond rate and different beta used will also have different affect in the final WACC.

So, WACC is more influenced by the market, especially different type of debt resources used.Nike Case Study Analysis By Ahmed Samir Haitham Salah Magdy Essmat Magdy Mohamed Sherif 2.

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Iran participated in the formation of the post-Taliban government in the Bonn Conference in December and contributed to reconstruction efforts, with the aim of establishing friendly ties with Kabul. Read the latest stories about Tech on Fortune. a) In Case Study Question (2), we found the cost of debt for Nike to be %.

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OVERVIEW OF THE CASE Nike is a major publicly traded sportswear, footwear and equipment supplier based in the US which was founded in originally known as Blue Ribbon Sports.

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