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Case Details and BackGround:
The case deals with the North Point Group, a mutual fund management firm. Where Kimi Ford, works as the portfolio manager. The North Point Mutual Fund generally invests in Fortune 500 companies. Recently, the company has been performing very well and returns have been much better than the returns from market. Ford was looking forward to buy some shares of Nike Inc. Nike’s performance hasn’t been very good. Nike’s market share has fallen and it has been impacted by supply chain issues and adverse effect of dollar. But recently, it has entered into mid-priced segment and has plans to push its apparel line. In the industry, the reactions by analysts were mixed. However Ford thought it will be better if she does her own analysis, on doing analysis, found out that Nike was undervalued at a discount rate of 11.2% and overvalued at 12 % However, she asked her new assistant Joanna Cohen to calculate the Nike’s cost of capital to confirm once again.
Capital Asset Pricing Model (CAPM):
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. CAPM is used as an important method while calculating the cost of equity of a company. The mathematical formula for CAPM is as follows:
Re = Rf + beta (Rm – Rf) or Re = Rf + beta * Risk Premium
Where, Re = Expected return on the security
Rf = Risk free rate of return
Beta = beta of the security
Rm = Expected market return
The g ...