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Nike Apparel
Executive Summary
? On a stand-alone basis, this project is a good project, albeit not a
great one.
• The average return on capital, even under the more conservative finite life
assumption, is 13.47%, which is higher than the cost of capital of 9.71%.
• The net present value of this project, using a cost of capital of 9.71%
• is $ 88 million, under the conservative assumption of a finite life of 12 years
• is $ 94 million, under the more realistic assumption of an infinite life
• On the two variables that are the most critical - market share and
operating margin - the firm has a reasonable margin for error on market
share and a narrower margin for error on operating margins.
? If we consider the potential project synergies (i.e. the gains to the
shoe division from having an apparel division), it will make this
project a more attractive one.
Cost of Capital: Nike Apparel
? Debt to Equity ratio for Nike
• Market Value of Equity = $ 64* 498.7 mil = $ 31,917 mil
• Market Value of Debt = $49.7 (PV of annuity, 4 yrs, 5.75%) + $541.2/1.05754 = $
606 million
• PV of Operating lease commitments = $1,229 million
• Market Value D/E Ratio = 5.75%; MV Debt/Capital Ratio = 5.44%
? Unlevered Beta for Apparel Business
• Average Beta of Apparel firms = 1.18
• Aggregate D/E Ratio of Apparel firms = 12.59% (The average is 22.25%)
• Unlevered Beta = 1.18/(1+ (1-.4) (.1259)) = 1.097
? Beta for Nike Apparel = 1.097 (1+ (1-.4)(.0575)) = 1.135
? Cost of capital calculation for apparel project
• Cost of Equity = 4.5% + 1.135 (4.91%) = 10.07%
• After-tax Cost of Debt = 5.75% (1-.4) = 3.45%
• Cost of Capital = 10.07% (.9456) + ...