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Nike, Inc.: Cost of Capital

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Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald’s, 3M, and
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Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

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Analysts’ reactions were mixed. Some thought the financial targets were too /LL0+887,+`) >E6+08) 8/:)
significant growth opportunities in apparel and in Nike’s international businesses.)

Ford read all the analysts’ reports that she could find about the June 28 meeting, but the reports gave her
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&)Nike’sfiscal year ended in May.)

3)Douglas Robson, “Just Do…Something: Nike’s Insularity and Foot$Dragging Have It Running in Place,” BusinessWeek)]3)F@BC)344&b-)
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Joanna Cohen, to estimate Nike’s cost of capital. )

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Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.
Educational material supplied by The Case Centre
Copyright encoded A76HM-JUJ9K-PJMN9I
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Nike, Inc.: Cost of Capital
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Year Ended May 31 1995 1996 1997 1998 1999 2000 2001
(in millions of dollars except per-share data)

Revenues $ 4,760.8 $ 6,470.6 $ 9,186.5 $ 9,553.1 $ 8,776.9 $ 8,995.1 $ 9,488.8

Cost of goods sold 2,865.3 3,906.7 5,503.0 6,065.5 5,493.5 5,403.8 5,784.9
Gross profit 1,895.6 2,563.9 3,683.5 3,487.6 3,283.4 3,591.3 3,703.9

Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
Selling and administrative 1,209.8 1,588.6 2,303.7 2,623.8 2,426.6 2,606.4 2,689.7
Operating income 685.8 975.3 1,379.8 863.8 856.8 984.9 1,014.2

Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

Interest expense 24.2 39.5 52.3 60.0 44.1 45.0 58.7
Other expense, net 11.7 36.7 32.3 20.9 21.5 23.2 34.1
Restructuring charge, net - - - 129.9 45.1 (2.5) -
Income before income taxes 649.9 899.1 1,295.2 653.0 746.1 919.2 921.4
Income taxes 250.2 345.9 499.4 253.4 294.7 340.1 331.7
Net income $ 399.7 $ 553.2 $ 795.8 $ 399.6 $ 451.4 $ 579.1 $ 589.7
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Copyright encoded A76HM-JUJ9K-PJMN9I

Diluted earnings per common share $ 1.36 $ 1.88 $ 2.68 $ 1.35 $ 1.57 $ 2.07 $ 2.16
Average shares outstanding (diluted) 294.0 293.6 297.0 296.0 287.5 279.8 273.3

Growth (%)
Revenue 35.9 42.0 4.0 (8.1) 2.5 5.5
Operating income 42.2 41.5 (37.4) (0.8) 15.0 3.0
Net income 38.4 43.9 (49.8) 13.0 28.3 1.8

Margins (%)
Gross margin 39.6 40.1 36.5 37.4 39.9 39.0
Operating margin 15.1 15.0 9.0 9.8 10.9 10.7
Net margin 8.5 8.7 4.2 5.1 6.4 6.2

Effective tax rate (%)* 38.5 38.6 38.8 39.5 37.0 36.0
*The U.S. statutory tax rate was 35%. The state tax varied yearly from 2.5% to 3.5%.
Sources of data: Company filing with the Securities and Exchange Commission (SEC), UBS Warburg.
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Nike, Inc.: Cost of Capital
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Assumptions:
Revenue growth (%) 7.0 6.5 6.5 6.5 6.0 6.0 6.0 6.0 6.0 6.0
COGS/sales (%) 60.0 60.0 59.5 59.5 59.0 59.0 58.5 58.5 58.0 58.0
SG&A/sales (%) 28.0 27.5 27.0 26.5 26.0 25.5 25.0 25.0 25.0 25.0
Tax rate (%) 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0
Current assets/sales (%) 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0
Current liabilities/sales (%) 11.5 11.5 11.5 11.5 11.5 11.5 11.5 11.5 11.5 11.5

Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
Yearly depreciation and capex equal each other.
Cost of capital (%) 12.00

Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

Terminal growth rate (%) 3.00

Discounted Cash Flow

(in millions of dollars except per-share data)
Operating income $ 1,218.4 $ 1,351.6 $ 1,554.6 $ 1,717.0 $ 1,950.0 $ 2,135.9 $ 2,410.2 $ 2,554.8 $ 2,790.1 $ 2,957.5
Taxes 463.0 513.6 590.8 652.5 741.0 811.7 915.9 970.8 1,060.2 1,123.9
NOPAT 755.4 838.0 963.9 1,064.5 1,209.0 1,324.3 1,494.3 1,584.0 1,729.9 1,833.7
Capex, net of depreciation - - - - - - - - - -
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Change in NWC 8.8 (174.9) (186.3) (198.4) (195.0) (206.7) (219.1) (232.3) (246.2) (261.0)
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Free cash flow 764.1 663.1 777.6 866.2 1,014.0 1,117.6 1,275.2 1,351.7 1,483.7 1,572.7
Terminal value 17,998.3
Total flows 764.1 663.1 777.6 866.2 1,014.0 1,117.6 1,275.2 1,351.7 1,483.7 19,571.0
Present value of flows $ 682.3 $ 528.6 $ 553.5 $ 550.5 $ 575.4 $ 566.2 $ 576.8 $ 545.9 $ 535.0 $ 6,301.2
Enterprise value $ 11,415.4
Less: current outstanding debt 1,296.6
Equity value $ 10,118.8
Current shares outstanding 271.5
Equity value per share $ 37.27 Current share price: $ 42.09

Sensitivity of equity value to discount rate:

Discount rate Equity value
8.00% $ 75.80
8.50% 67.85
9.00% 61.25
9.50% 55.68
10.00% 50.92
10.50% 46.81
11.00% 43.22
11.17% 42.09
11.50% 40.07
12.00% 37.27 Source: Case writer's analysis. ))
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Nike, Inc.: Cost of Capital
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As of May 31,
(in millions of dollars) 2000 2001
Assets
Current assets:
Cash and equivalents $ 254.3 $ 304.0

Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
Accounts receivable 1,569.4 1,621.4
Inventories 1,446.0 1,424.1

Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

Deferred income taxes 111.5 113.3
Prepaid expenses 215.2 162.5
Total current assets 3,596.4 3,625.3

Property, plant and equipment, net 1,583.4 1,618.8

Educational material supplied by The Case Centre

Identifiable intangible assets and goodwill, net 410.9 397.3

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Deferred income taxes and other assets 266.2 178.2

Total assets $ 5,856.9 $ 5,819.6
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term debt $ 50.1 $ 5.4
Notes payable 924.2 855.3
Accounts payable 543.8 432.0
Accrued liabilities 621.9 472.1
Income taxes payable - 21.9
Total current liabilities 2,140.0 1,786.7
Long-term debt 470.3 435.9
Deferred income taxes and other liabilities 110.3 102.2
Redeemable preferred stock 0.3 0.3

Shareholders' equity:
Common stock, par 2.8 2.8
Capital in excess of stated value 369.0 459.4
Unearned stock compensation (11.7) (9.9)
Accumulated other comprehensive income (111.1) (152.1)
Retained earnings 2,887.0 3,194.3
Total shareholders' equity 3,136.0 3,494.5
Total liabilities and shareholders' equity $ 5,856.9 $ 5,819.6

Source of data: Company filing with the Securities and Exchange Commission (SEC). )
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Nike, Inc.: Cost of Capital
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Current Yields on U.S. Treasuries Nike Share Price Performance Relative to S&P 500:
January 2000 to July 5, 2001
3-month 3.59%
6-month 3.59%
1.3
1-year 3.59%
5-year 4.88% 1.2

10-year 5.39% 1.1

Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
20-year 5.74% 1.0

Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

0.9
Historical Equity Risk Premiums (1926-1999)
0.8
Geometric mean 5.90%
Arithmetic mean 7.50% 0.7

0.6
Current Yield on Publicly Traded Nike Debt* 0.5
Coupon 6.75% paid semi-annually 0.4
Educational material supplied by The Case Centre

Issued 07/15/96

Nov-00
May-00

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Jul-00

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Mar-00

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Maturity 07/15/21
Current Price $ 95.60
Nike S&P 500

Nike Historic Betas

1996 0.98
1997 0.84 Nike share price on July 5, 2001: $ 42.09
1998 0.84
1999 0.63 Dividend History and Forecasts
2000 0.83 Paymt Dates 31-Mar 30-Jun 30-Sep 31-Dec Total
YTD 6/30/01 0.69 1997 0.10 0.10 0.10 0.10 0.40
1998 0.12 0.12 0.12 0.12 0.48
Average 0.80 1999 0.12 0.12 0.12 0.12 0.48
2000 0.12 0.12 0.12 0.12 0.48
2001 0.12 0.12
Consensus EPS estimates:
FY 2002 FY 2003 Value Line Forecast of Dividend Growth from '98-'00 to '04-'06:
$ 2.32 $ 2.67 5.50%
* Data have been modified for teaching purposes.
Sources of data: Bloomberg Financial Services, Ibbotson Associates Yearbook 1999, Value Line Investment Survey, IBES. )
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Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
I!HFdG5X) Nike’s cost of capital)

Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.

Based on the following assumptions, my estimate of Nike’s cost of capital is 8.4%:)

I. Single or Multiple Costs of Capital?

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=>0)^-(_)>=)0+,+D@+-)

I asked myself whether Nike’s business segments had different enough risks from each other to
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II. Methodology for Calculating the Cost of Capital: WACC

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Purchased for use on the SMM467 Corporate Finance and Valuation, at Bayes Business School.
Taught by Sonia Falconieri, from 30-Sep-2024 to 30-Mar-2025. Order ref F516742.
III. Cost of Debt

My estimate of Nike’s cost of debt is 4.3%. I)/007,+<)/E)E678)+8E7?/E+)AC)E/M7DL)E>E/B)7DE+0+8E)+V;+D8+)

for the year 2001 and dividing it by the company’s average debt balance.&) 56+) 0/E+) 78) B>:+0) E6/D)
50+/8@0C)C7+B<82)A@E)E6/E)78)A+9/@8+)R7M+)0/78+<)/);>0E7>D)>=)7E8)=@D<7DL)D++<8)E60>@L6)F/;/D+8+)C+D)
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obtained by adding state taxes of 3% to the U.S. statutory tax rate. Historically, Nike’s state taxes
6/,+)0/DL+<)=0>?)3-(_)E>)'-(_-)

IV. Cost of Equity

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E6+)9>8E)>=)+P@7EC-)KD)?C)>;7D7>D2)6>:+,+02)E6+)G#S.)78)E6+)8@;+07>0)?+E6><-)

My estimate of Nike’s cost of equity is 10.5%. I used the current yield on 20$C+/0)50+/8@0C)A>D<8)/8)
?C)078M$=0++)0/E+2)/D<)E6+)9>?;>@D<)/,+0/L+);0+?7@?)>=)E6+)?/0M+E)>,+0)50+/8@0C)A>D<8)](-Z_b)/8)
?C)07sk premium. For beta, I took the average of Nike’s betas from 1996 to the present.)

Putting It All Together

#=E+0)+DE+07DL)all my assumptions into the WACC formula, my estimate of Nike’s cost of capital is 8.4%.)
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