Page 77 - DMGT409Basic Financial Management

Basic Financial Management

Notes
20.7 per cent even as the S&P 500 fell 10.1 per cent. The fund’s year-to-date returns at the
end of June 2001 stood at 6.4 versus the S &P – 7.3 per cent.

Only a week ago, on June 28,2001, Nike held an analyst’ meeting to disclose its fi scal-
year 2001 results. The meeting, however had another purpose : Nike management wanted
to communicate a strategy for revitalizing the company. Since 1997 Nike’s revenues had
plateaued at around $9 billion, while net income had fallen from almost $ 800 million to
$580 million (see Exhibit 1). Nike’s markets in the U.S. had fallen from 48 per cent in 1997
to 42 per cent in 2000. In addition, recent supply-chain issues and the adverse effect of a
strong dollar had negatively affected revenue.
At the meeting, the management revealed plans to address both-line growth and operating
performance. To boost revenue, the company would develop more athletic-shoe products
in the mid-priced segment – a segment that had been overlooked in the 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, the company’s executives reiterated their long-term

revenue growth targets of 8-10 per cent and earnings-growth targets of above 1 percent.

The Analysts reactions were mixed. Some thought, the financial targets too aggressive ; other

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 analysts expressed misgiving about the company and recommended a
“Hold”. Ford decided instead to develop her own discounted-cash-fl ow forecast to come
to a clearer conclusion.
Her forecast showed that, at discount rate of 12 per cent, Nike was overvalued at its current
share price of $42.09 (see Exhibit 2). She had, however, done a quick sensitivity analysis
that revealed Nike was valued at discount rates below 11.2 per cent. As she was about to
go into a meeting, she asked her new assistant, Joanna Cohen, to estimate Nike’s cost of
capital.
Cohen immediately gathered all the data she though she might need (Exhibits 1,2,3 and
4) began to work on her analysis. At the end of the day, she submitted her cost-of-capital
estimate and a memo (Exhibit 5) explaining her assumption to Ford.
Exhibit 1: Consolidated Income Statements
Year ended May 31
(in millions excepts per share data)

2000 2001 2002 2003 2004 2005 2006
Revenues 4,760.8 6,470.6 9,816.5 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 7,784.9
Gross profi t 1,895.6 2,563.9 3,683.5 3,487.6 3,283.4 3,591.3 3,703.9
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
Interst 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 1,295.20 653.0 746.1 919.2 921.4
Income taxes 250.2 345.9 499.4 253.4 294.7 340.1 331.7
Net Income 399.7 553.2 795.8 399.6 451.4 579.4 589.7

Contd...

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