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Examine the mix of debt and equity that Nike, Inc. uses. After finding this information:
1. Compare this to an industry average and a main competitor of Nike, Inc.. What are the differences?
2. Based on what you know about Nike, Inc., do these differences seem appropriate?
3. Relate Nike, Inc. capital structure choices to the appropriate capital structure theory(ies) such as the trade off theory, pecking order theory, etc.
4. Obtain the current stock price for Nike, Inc. and use it as an additional calculation. Based upon all of your research, would you recommend investing in this company?
Write a summary of your findings for #1 thru #4 in APA style format, including any calculations you made, and how you gathered your information.
5. Use all of the information that you have gathered in previous weeks (see below) to write an executive summary of Nike, Inc. investment analysis key points.
Required rate of Return Determination
The dividend growth rate of Nike Inc. can is determined by averaging the divided growth rate of the firm’s dividends over the last five years as figure 1 below shows.

According to Siddaiah (2009) the required rate of return issuing the discounted growth model is determined using the following formulae.
Required rate of return= growth rate + current annual dividends (1+g)/ current share price
= 12.67% + 0.54 (1+12.67%)/ 57.87
= 13.72%
Does the required rate of return seem logical or feasible?
In the case of Nike Inc. the required rate of return is 13.72% while the average dividend growth rate is 12.67% which means that the required rate of return is higher than the dividend growth rate. Stowe (2008) explicates that the firm’s rate of return for projects undertaken during a year should be above the dividend growth rate so as to ensure that the firm pays the dividends from the returns in profits realized during the year. In this case, the required rate as determined to be 13.72% is feasible.
Problems of adopting Dividend growth model
The principle problem encountered during the adoption of dividend growth model is that the model assumes that the perpetual growth rate is less than the cost of capital for Nike which is not always reasonable. Secondly, in determining the required rate of return, the growth rate of the dividends paid by the firm are assumed to be constant. However, in reality the amount of dividends paid by the firm is determined by the board of directors.
Is it reasonable to assume constant growth rate of Nike Inc.
No. The determination of the dividend per share is exercised by the board of directors who may decide to either pay or not to pay dividends. As such, the assumption that dividends growth is constant is misplaced.
Referring to the balance sheet and financial statement of Nike and Adidas Company, the DuPont identity for the past three years can be calculated when a comparison in their financial performance is made. The DuPont analysis is portrayed to be the method of performance measurement. In this analysis, assets are measured in consideration to their gross book value rather than the net book value. The calculation is generally done for the result to produce a higher return to be experienced in the return on equity (Bilgin & Danis, 2016). In calculating the DuPont identity for Adidas and Nike, the operating efficiency is consider, which is determined by ratio of profit, leverage brought financially which is identified by the equity multiplier and finally the asset use efficiency, which is identified by the turnover of total asset.
Calculations for year 2013 through 2014 are presented below.
Nike profit for three years
Time period Revenue in millions Rate of growth
May 31, 2013 20,117
May 31, 2014 23,331 13.78 percent
May 31, 2015 25,313 7.83 percent

Name of the company
Nike 2015 Adidas 2015
Assets size in million 17,584 15,802
Total sales revenue for three years
Time period Amount of sales in millions Rate of growth
Dec 31, 2013 17,190 12.2%
Dec 31, 2014 19,791 13.14%
Dec 31, 2015 19,744 -0.24%

ROE=Profit Margin (sales/profit*Total asset Turnover (Assets/Sales)*Equity Multiplier (Equity/Assets)
Nike DuPont Analysis
2013 ROE for Nike=20,117*17,584*13.78%=48,745,003.79
2014 ROE for Nike=23,331*18,584*13.78%=59,747,779.29.12
2015 ROE for Nike=25,313*17,584*7.83%=34,851,626.91
Average Nike DuPont Analysis for past three years=47,781,469.9412
Adidas DuPont Analysis
2013 ROE for Adidas=17,190*12.2%*15,802=32,596,365.6
2014 ROE for Adidas=19,791*13.14%*16,302=42,394,069.48
2015 ROE for Adidas=19,744*-0.24%*15,802=784,787.2512
Average Adidas DuPont analysis for the past three years=25,246,407.44
In the investment analysis and DuPont analysis of Nike and Adidas, Adidas as a competitor of Nike portrays a good and solid financial statements and performance. In the area of assets, Nike, Inc. has achieved an increasingly large market share when it comes to value of their assets. Nike, Inc. in their DuPont identity has large average with great performance as compared to Adidas.
Nike, Inc. being one of the major footwear brands producers around the globe are faced with a constant necessity to revisit the innovative platform. Nike is the leading brand when it comes to the clothing industry among their competitors and being a leading brand in the industry they are required to keep on generating innovative ideas and develop new products. The option at an open angle of consideration it is an industrial level of strategizing whereby the company is bound to compete against other highly competitive brands such as Adidas and Reebok while there are still other competitors who are solely in the clothing industry such as Fitch and Old Navy. This means that Nike would be forced to allocate a lot of reserve capital and retain large portions of their profits so as to launch commanding advertisements in the market, product promotion programs and other offers such as product discounts. This would enable them compete fairly and retain their competitive advantage in the market.
The capital budgeting would thus be faced by many reservations and allowances to allow for promotional costs and discount rates to be implemented. This is because Nike as a company has succeeded in management at a company level and thus only needs to implement their industrial presence. Furthermore, Nike has ended up recording a minimal profit margin when compared to the industrial average earnings and thus the need to implement decisions based on an industrial level of competition. The profit margins ranged at 5.15% while that of the industry ranged at 5.70% caused by the decreasing levels of sales (Ross, Westerfield, & Jordan, 2016). . The marketing budget has been wavering at approximately $100 million which is relatively high and thus needs other implementation strategies such as product diversification.
Question1

Estimate of beta, Nike, Inc. is 0.08
The current interest rate for 3months
Present value=future value
Interest rate =5.93%
Appropriate market premium

r 1=5.39% beta =0.080, risk premium=5.90%
CAPM=5.39%+0.80*5.90%=10.11%

The free risk rate= 5.38 the beta which measure the stock= 0.08
The expected return over the period is=10.11
Expected return = (5.38+5.9(10.1-5.38)=33.228
Expected return =33.228
Question2

D (1) = estimated value pertaining to esteemed value
g=the constant growth rate for dividends =12.6
r= the company cost of equity capital
Price per share = D (1)=D(0)*(1+12.6)= 0.3(0)*0.3*(12.6+5.28)= 146

Question 3

Capital asset model helps in the description of the relationship that is existing between the risk and the expected return that is majorly used in risky security. Investors are to be compensated for their risk that is involved and the time value for their money
The weighted average cost of a firm is calculated using the following formula.
WACC= E / (E+D) * ke + D / (E+D) * kd (1-tax rate)
The capital of Nike, Inc. is financed by both equity and debt. The value of equity as at 6th August 2016 was $ 93711 million, which is equal to the market capitalization today (“NKE Nike Inc B XNYS:NKE Stock Quote Price News”, 2016). The value of debt from the statement of financial statement was $ 9138 million (“NIKE, Inc. – Investor Relations – Investors – News, Events and Reports”, n.d.).
Therefore, the weighted equity capital 93711 / (93711+9138) = 0.9111
The weighted debt capital 9138 / (93711+9138) = 0.089
To calculate the cost of capital, CAPM (Capital Asset Pricing Model) was used. Where
Cost of equity = Risk free rate + beta*(Expected return – Risk free rate)
The risk free rate for ten year Treasury bond is 1.51% while the market beta for Nike inc. is 0.57 and the expected return is 2.9075
Cost of equity = 1.51+0.57*(2.9075 – 1.51) = 2.0515 %
Cost of debt = interest expense / total debt
18 / 9138 = 0.002%
The tax rate for the year was 18.7 % from the income statement
Therefore,
WACC = 0.911 * 2.0515 + 0.089 * 0.002 (1 – 18.7)
1.8689 + 0.0159 = 1.885 %
The expected return of Nike Inc was estimated from the cost of bonds to their maturity calculated as.
Expected return = w1R1 + w2R2.+ w3R3
The debt to maturity of the company were as shown below
Bond value Rate
$ 1000 million 3.32 %
$ 500 million 3.26 %
$ 500 million 1.73 %
Therefore, expected return = 3.32% * 1000/2000 + 3.26 % * 500/2000 + 1.73*500/20000
= 2.9075 %
The use of the weights helps in distributing the effect of the three bonds to the overall expected rate of return for the three debts.
If the Nike uses the calculated WACC in calculation of the NPV, it is assumed that the company will reinvest at the same rate and the cost of the debts will not change in future. Also, it will be assumed that the company will not borrow more debt capital in future for the period that NPV and IRR are calculated using the WACC. Nike will also face a challenge in using the WACC in making future actions because investment risk changes from time to time. Also, Nike internal operation departments in different geographical divisions are faced with different risks.
Write an executive summary of the key findings from the above in APA style format, including any calculations you made, and how you gathered your information.

Reference
Nike, Inc. Annual Report (n.d.). Nike Inc. Investors. Retrieved from
http://investors.nike.com/investors/news-events-and-reports/?toggle=earnings

Adidas, Inc. Annual Report (n.d.). Adidas Inc. Investors. Retrieved from
http://www.adidas-group.com/en/investors/overview/