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Introduction
This case study mainly does a pricing of the share of Nike. The question below will be answered in this case study: 1)Do you agree with Joanna’s analysis? Why or why not? 2) Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 3) What should Kimi Ford recommend regarding an investment in Nike?(Wendy, PowerPoint Slide:P43)
The judgment of Joanna’s Analysis
I partially agree on Joanna’s analysis. First, she considered single costs of capital as the basis to calculating the cost of the capital: WACC. This is quite reasonable because “I concluded that it was only the Cole-Haan line that was somewhat different; the rest were all sports-related businesses. However, since Cole-Haan makes up only a tiny fraction of revenues, I did not think it necessary to compute a separate cost of capital(Robert, P201).” All the sports businesses including the footwear, the clothes and the equipment designed for sports are meeting the same customer, sold by the same stores and market, delivered by the same Channels. So there is no quite difference among the sectors in Nike.
And secondly, Joanna continue her analysis calculating the portion of Debt and Equity in balance sheet. But, in my opinion, the portion of debt and equity of total capital should be 34% and 66%:
Capital Sources Book Values
Debt
Current portion of long-term debt $ 5.4
Notes payable ...