Nike, Inc.: Cost of Capital

In: Business and Management

Submitted By titanlin
Words 1045
Pages 5
I. Statement of the problem
Nike has new investment endeavors revamp its recent drops in net income and market share. Wall Street analyst reactions to the endeavors are mixed, with some recommending Nike as a “Strong Buy” and others recommending a “Hold.” In case 13, Nike Inc.: Cost of Capital, I am acting as a portfolio manager to estimate Nike’s cost of capital to determine whether the stock is overvalued or undervalued.

II. Alternative Solutions

• Dividend Growth Model (DGM) see appendix for calculations
• Capital Asset Pricing Model (CAPM) see appendix for calculations
• Weighted Average Cost of Capital (WACC) see appendix for calculations

III. Analysis of the Alternatives
• Dividend Growth Model (DGM)
The Dividend growth model is a simple and easy to understand model used to estimate a company’s cost of capital. The method works because RE the return that the stockholders require to the stock, so it can be interpreted as the firms cost of equity capital. In able to use this method I used Value Line’s Forecast of Dividend Growth from ’98-00 to ’04-’06 of 5.50% for Nike as my growth (g) ( see Exhibit 4). I was able to forgo the calculation of D1 because Nike had paid a constant dividend of .48 for the past 3 years (Exhibit 5).
Although the method is simple in its approach, DGM does not account explicitly for risk. There is no adjustment for the riskiness of the investment.

• Capital Asset Pricing Model (CAPM)
The CAPM is widely used to determine a company’s cost of equity because it explicitly adjusts for risk. Being able to adjust for CAPM is applicable to a wider range of companies, allowing it to be useful in a variety of circumstances. In determining CAPM I used the yield on the 10 year Treasury bond (5.74%) as my risk-free rate, instead of the 20 year bond, because according to Best Practices amongst the industry, many corporations said…...

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