Executive Summary

On July 5, 2005, Nikes share price had declined significantly from the start of the year. Management revealed plans to address both top-line growth and operating performance.

OBJECTIVE
Since 1997, Nikes revenue had plateaued at around $9 billion, while net income had fallen from almost $800 million to $580 million. Nikes market share in U.S. athletic shoes had fallen from 48% in 1997 to 42% in 2000
To boost revenue, the management planned to develop more athletic shoe products in the mid-priced segment, and also to push its apparel line.

On the cost side, Nike would exert more effort on expense control. Because of the unclear conclusion of analysis done by the team, it is important to estimate Nikes cost of capital.

ANALYSI S
Discounted cash flow method
Cost of Capital = 12% Growth = 3%
1 Year Free Cash Flow Terminal Value Total FCF 764.1 663.1 777.6 866.2 1014 1117.6 1275.2 1351.7 2002 $764.1 2 2003 663.1 3 2004 777.6 4 2005 866.2 5 2006 1014 6 2007 1117.6 7 2008 1275.2 8 2009 1351.7

Exhibit 2
9 2010 1483.7 10 2011 1572.7 17998.678 1483.7 19571.378

PV of FCF

682.232

528.619

553.480

550.486

575.371

566.211

576.836

545.929

535.037

6301.46

Enterprise value (Vc) = $11,415.66 Current outstanding debt (Vd) = $1,296.6 Equity Value (Vs) = Vc Vd =$11,415.66 $1,296.6 = $10,119.06

Shares outstanding = 271.5 Equity value per share = $ 37.27 Current Price = $42.09

SENSITIVITY
Sensitivity Equity Value to Discount Rate
Discount rate 8% 8.50% 9% 9.50% 10% 10.50% 11% 11.17% 11.50% 12%

75.80 67.85 61.25 55.68 50.92 46.81 43.22 42.09 40.07 37.27

If the data beside is assumed, the cost of capital = 12%, it can be seen that the value of stock is overvalued.

Weight Average of Cost Capital

Wacc Wd ra (1 r ) Ws rs V p W p

Wd Ws EV

= 1,296.6 = Shares outstanding x Current Price = 271.5 x 42.09 = 11,427.44 = Ws + Wd = 1,296.6 + 11,427.44 = 12,724.04 = 10.19% = 89.81%

Wd Weight Ws Weight

 Cost of Debt before tax = YTM (20 years)

(Exhibit 4)
The share Issued at 1996, matured at 2021. Current Yield = 20 years (2001) = 5.74% Book Value = $95.6
Data

PV FV n Coupon Rate Coupon Semi Annual Period Semi Annual

95.6 100 20 6.75% 3.375 40

C M Bv YTM 2 n 100% 7.13% M Bv 2 2

1.CAPM method
rs RF ( (rm RF )) rs 5.74% (0.8 5.9%) rs 10.46%

Wacc 10.19% 7.13%(1 38%) 89.81% 10.46% Wacc 9.84%

Current price Value per share = $42.09 = 52.37

2.DDM method
rs = rs = rs = D1 g Po D1 (1 g) g Po

Wacc = 10.19% x 7.13%(1- 38%) + 89.81% x 6.7% Wacc = 6.47%

0.48(1+ 5.5%) 5 .5 % 42.09 rs = 6.7%

3. Earning Capitalization method

E1 2.16 rs = = = 5.13% Po 42.09

Wacc = 10.19% x 7.13%(1- 38%) + 89.81% x 5.13% Wacc = 5.06%

CONCLUSION
1. In order to calculate the weight in equity, the market value should be used instead of book value.
2. In calculating cost of debt, yield to maturity should be used instead of dividing total interest rate with average debt balance. 3. The (risk of firms) used is the average value because betas value is statistical value.

RECOMMENDATION
1. The valuation should be $52.37, with current price of $42.09. It is undervalued by amount of $10.28, which means it is recommended to buy.
2. The most effective method to find cost of equity here is CAPM because it directly considers firms risks as reflected by beta. 3. Discounted cash flow method is commonly used for stock valuation at most industries.

and

thank you