Essay on Nike Case

1093 Words Feb 14th, 2008 5 Pages
BACKGROUND

Kimi Ford, a portfolio manager of a large mutual fund management firm, is looking into the viability of investing in the stocks of Nike for the fund that she manages. Ford should base her decision on data on the company which were disclosed in the 2001 fiscal reports. While Nike management addressed several issues that are causing the decrease in market sales and prices of stocks, management presented its plans to improve and perform better. Third party sources also gave their opinions on whether the stock was a sound investment.

PROBLEMS:

1. What is the WACC and why is it important to estimate a firm's cost of capital? Do you agree with Joanna Cohen's WACC calculation? Why is it important to estimate a firm's
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Where:
• is the expected return on the capital asset
• is the risk-free rate of interest
• (the beta coefficient) the sensitivity of the asset returns to market returns, or also ,
• is the expected return of the market
• is sometimes known as the market premium or risk premium (the difference between the expected market rate of return and the risk-free rate of return). Note 1: the expected market rate of return is usually measured by looking at the arithmetic average of the historical returns on a market portfolio (i.e. S&P 500). Note 2: the risk free rate of return used for determining the risk premium is usually the arithmetic average of historical risk free rates of return and not the current risk free rate of return.

Rf on a 20 year bond 5.74%
?s on Nike's historic average beta from 96 to 00 .80
Rm,

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