Kimi Ford - Northpoint Group

Introduction

Background

Kimi Ford is a portfolio manager at NorthPoint Group. NorthPoint Group is a mutual fund management firm, which invests mostly in Fortune 500 companies such as ExxonMobil, General Motors, McDonalds, and others. While the stock market had declined over a period of time, NorthPoint Large-Cap Fund had performed extremely well. It earned a return of 20.7%, even when the S&P 500 dropped 10.1%. Ford was considering buying some Nike shares for the fund she managed. Nike's share price had been declining significantly over the year.

Nike had held an analysis meeting meant to discuss fiscal year results but instead, management communicated a strategy for revitalizing the company. Revenues had been steady and not increasing, net income had fallen from almost $800 million in 1997 and fallen to $590 in 2001. The market share on athletic shoes had fallen as well from 48% to 42%. At the meeting, management revealed plans to address top-line growth and operating performance. They also planned to add more athletic shoes in the midpriced segment to increase revenues. Nike also planned to push apparel line under the leadership of Mindy Grossman, who had performed very well in that business segment. Grossman was a recent addition to Nike and was a former chief executive of an apparel division.

On the cost side, Nike would give more effort on expense control. They targeted 8%- 10% on long-term revenue-growth and 15% on earnings-growth. Some analysts thought financial targets were too high while others saw significant growth opportunities in the company.

Ford was undecided on whether to buy or hold on Nike shares. She looked at several reports but she could not get clear guidance. She decided to create her own discounted cash flow forecast to help her come up with a conclusion. Her forecast showed that at 12% discount rate, the current share price of $42.09 was overvalued. The sensitivity analysis also stated that the company was undervalued at any rate lower than 11.17%. Last, she asked for an estimate of the cost of capital from her new assistant, Joanna Cohen.

Statement of the situation

Kimi Ford wants to come up with estimates and information that will help her make a decision regarding the purchase of Nike shares. Even though she knows about Nike's current stock price and net income decline, she sees potential in the company. She has created a discount cash flow analysis as well as a sensitivity table of the equity value to discount rate but she is missing Nike's cost of capital. Cohen proceeds to perform an estimate of the cost of capital of the company and gathers information she thought was needed in order to do so.

Cohen has submitted a memorandum along with her estimate to Ford. Included in the memo, there are four sections being analyzed, starting