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Discussion Points: 1. What is the WACC and why is it important to calculate a firms cost of capital? Do you agree with Joanna Cohens WACC calculation? Why or why not?

2. If you do not agree with Cohens analysis, calculate your own WACC for Nike and be

prepared to justify your assumptions.

3. Reflect on what you learned from this assignment and how you might incorporate the lessons learned in your future careers.

Can someone answer and explain all three discussion points, also how and why they reached their answer choices. Please and Thanks in advance!

Nike, Inc.: Cost of Capital On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analysts' write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike's share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald's, 3M, and other large-cap, generally old-economy stocks. Although the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1 At the end of June 2001, the fund's year-to-date returns stood at 6.4% versus -7.3% for the S&P 500 Only a week earlier, on June 28, 2001, Nike had held an analysts' meeting to disclose its fiscal-year 2001 results. The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues had plateaued at around S9 billion, while net income had fallen from almost $800 million to $580 million (see Exhibit 1 Nike's market share in U.S. athletic shoes had fallen from 48 in 1997, to 42% in 2000.2 In addition, recent supply-chain issues and the adverse effect of a strong dollar had negatively affected revenue. At the meeting, management revealed plans to address both top-line growth and operating performance. To boost revenue, the company would develop more athletic-shoe products in the midpriced segment -a segment that Nike had overlooked in recent years. Nike also planned to push its apparel line, which, under the recent leadership of industry veteran Mindy Grossman, had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, compa executives reiterated their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15% Analysts' reactions were mixed. Some thought the financial targets were too aggressive; others saw 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 no clear guidance: a Lehman Brothers report recommended a strong buy, while UBS Warburg and CSFB analysts expressed misgivings about the company and recommended a hold. Ford decided instead to develop her own discounted cash flow forecast to come to a clearer conclusion

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