Nike Case Study Summary
Since 1997, Nike’s revenues had plateaued around $9 billion, while net income had fallen from almost $800 million to $580 million, and their market share in athletic shoes had dropped from 48 percent in 1997 to 42 percent in 2000. In a meeting held on June 28, 2001, management announced plans to grow performance. To increase revenue, Nike is developing athletic shoes in a mid-priced segment. Nike also planned to push its apparel line. On the cost sides of things, they will be more conscientious on expenses.
As there are mixed feelings from analysts on these new plans, Kimi Ford is unsure what to do and had her own discounted cash flow forecast developed. As she was still unsure of her findings she had her assistant, Joanna Cohen, estimate Nike’s cost of capital. Cohen used WACC, weighted average cost of capital for the estimate of 8.3.
WACC is the weighted average cost of capital. Its calculations consist of a firm’s cost of capital in which each category of …show more content…
Those components are the current price of the stock, the latest dividend, and the expected growth rate of the dividend. To calculate Nike’s cost of equity using the DDM method we used the current price of $42.09, the latest dividend of $0.48, and a dividend growth rate of 4.66%. In order to find the dividend growth rate we used the dividends paid out in 1997 and 2000 to plug into the endpoint formula, that is how we came up with a dividend growth rate of 4.66% (Exhibit 4). When we plugged all of this information into the DDM, we came up with an estimated cost of equity of 5.86% (Exhibit