Nike Case

Nike Case 1. Should Nike be held responsible for working conditions in foreign factories that it does not own, but where subcontractors make products for Nike? No, I do not believe Nike should be responsible for working conditions in foreign factories. I do believe that there should be working standards in place and adhered to but I do not believe that is Nike’s responsibility. Nike is a business in order to run a successful business one must abide by good business practices including respecting others beliefs and values.It would be no different than if a Nike employee another employee how to raise their kids. As long as they are abiding by the laws governed in that their own country people are free to raise their children how they please. 2. What labor standards regarding safety, working conditions, overtime, and the like, should Nike hold foreign factories to: those prevailing in that country, or those prevailing in the United States? Nike should uphold the standards prevail ing in the particular country.If there are issued regarding safety, working conditions, overtime, etc, they should be discussed through separate entities, for instance the United Nations. 3. An income of $2. 28 a day, the base pay of Nike factory workers in Indonesia, is double the daily income of about half the working population. Half of all adults in Indonesia are farmers, who receive less than $1 a day. Given this, is it correct to criticize Nike for the low pay rates of its subcontractors in Indonesia? It is not appropriate to criticize Nike for low pay rates.According to salary. gov, the average American income is 46,326. If a company from United Arab of Emirates came exports products from a store in the U. S. and paid the works 105,623 (equal to the percentage raise Nike is paying in Indonesia), Americans would be grateful. 4. Could Nike have handled the negative publicity over sweatshops better? What might it have done differently, not just from a public relations perspectiv e, but also from a policy perspective? Yes, Nike could have handled the negative publicity better.For instance Andrew Young should have brought is own interpreter into the factories. There is no way of knowing what is actually being said and the motives behind a foreign interpreter. Nike took the right steps when it mandated hours worked per week, minimum wage per governing country, and raising the child labor laws. They set emplace standards and followed up with them. When they found businesses not adhering to the regulations they increased them, and gave the business a clear definition of what the regulation mandates.I don’t think Nike could/should have done anything else. 5. Do you think Nike needs to make any changes to its current policy? If so, what? Should Nike make changes even if they hinder the ability of the company to compete in the marketplace? No, I do not believe Nike needs to make changes to its current policy. The fact that they even implanted policy shows th eir character. If Nike did make changes and couldn’t compete in the market place thousands of Americans would be upset about losing their favorite sports brand, and millions of people would be out of jobs.The failure of Nike to compete in the market place could literally mean the down turn of foreign economies. 6. Is the WRC right to argue that the FLA is a tool of industry? The WRC is correct in stating FLA is a tool of the industry. However, the businesses involved are exactly that, businesses. The FLA was an appropriate step in the right direction for the pursuit of better business practices by other countries while maintaining the best business relationship possible. Disrespect, is not only a great way to lose business, but wars are literally started over it.FLA takes the times to look at the beliefs, and values of the companies it is working with and not just â€Å"do what they feel is the right thing to do†. 7. If sweatshops are a global problem, what might be a global solution to this problem? The United Nations should handle the sweatshop issue. That way it is not just the U. S. attacking, or implementing their business structures on other countries. The United Nations is specifically designed to handle global issues. Having multiple nations give their input and suggests would be an incredibly helpful and compromising tool for employees and employers in all countries. Nike Case Corporate Finance Nike, INC: Cost of capital 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? Definition of WACC (Weighted Average Cost of Capital): WACC is basically the average of the cost of finance (debt and equity). Since a company’s assets can be financed by debt or equity, WACC can show the averages of the costs involved in the sources of financing. These costs are then weighted by the users of the information as required in a specific situation.This shows how much both debt holders expect to pay in interest and how much return the shareholder can expect to receive, for each dollar of financing (Investopedia, ND). The calculation of the cost of capital is one of the important elements that decide the enterprise value. The value of the enterprise can significantly change when the percentage of cost of capital changes in the business model, with the cost of ca pital representing the expected return for shareholders. We disagree with Joanna’s WACC calculation for following reasons: The calculations of WACC and DCF can be effected as they are subjective by her human judgment.Even though there are no right answers to make these decisions, our team disagrees with some of the assumptions Joanna Cohen made. i. ‘Ratio of debt financing’ and ‘Ratio of equity financing’ It has to be applied the market value because current shareholders’ expected return has to be reflected. Both ratios should be calculated not by using ‘Book Value’ but ‘Market Value’. ii. Cost of Debt Cost of Debt can be calculated with the current yield publicly traded in the market, because we are projecting the future cash flows. Joanna calculated this by using historical data.However cost of debt should be calculated using current YTM of debt. iii. Cost of Equity Joanna calculated cost of debt by using following CAPM formula: Cost of Equity = 5. 74% (20 year Treasury bond) +0. 80 (Average Historic Nike beta) *5. 9% (Average premium of the market over Treasury) =10. 5% When calculating the beta, using the most current beta is better than using the average, because the current beta reflects the most recent environment of Nike stock. 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. i. Ratio of debt financing’ and ‘Ratio of equity financing’ Market value of debt = 5. 4 + 855. 3 + 435. 9 = $1,296. 6million Market Value of equity= There is no information about market value of debt. We will use ‘Book Value’ $1296. 6million Market Value of equity= Share price ($42. 09) * Shares outstanding (271. 5million) =$11,427. 4million Ratio of debt financing=1,296. 6 / (1,296. 6+11,427. 4) = 10. 19% Ratio of equity financing=11,427. 4/ (1,296. 6+11,427. 4) = 89. 81% WACC=9. 81%*89. 81%+7. 168 %* ( 1-38%)*10. 19% =9. 26% ii.Cost of Debt Market value of debt should be: Current price of debt: $95. 60 Coupon rate: 6. 75%(semiannual) =coupon $3. 375 per 6month Period to maturity: 20 years =40 period Face value: $100 YTM (=cost of debt) =3. 584% (semi annual) =7. 168% (annual) iii. Cost of Equity Using CAPM formula Cost of Equity = 5. 74% (20 year Treasury bond) +0. 69 (Latest beta) *5. 9% (Average premium of the market over Treasury) =9. 81% 3. Calculate the costs of equity using CAPM and the dividend discount model. What are the advantages and disadvantages of each method? * CAPM Cost of Equity = 5. 4% (20 year Treasury bond) +0. 69 (Latest beta) *5. 9% (Average premium of the market over Treasury) =9. 81% Advantage:| * CAPM considers only systematic risk, beta. It does not consider company specific risk. * It is useful to see an individual stock in entire portfolio. | Disadvantage:| * Some inputs are hard to reflect the situation of real world. * Relatively difficult to use co mpared to DDM| * DDM Share Price($42. 09) = Dividend($0. 48) / (re –Dividend Growth(5. 5%)) re(Cost of Equity) = 6. 64% Advantage:| * DDM only focuses on an individual stock rather than a portfolio. Always use, when calculating stock price. * Relatively easy to use compared to CAPM. | Disadvantage:| * Results are very sensitive to change when assumptions are inputted| 4. What should Kimi Ford recommend regarding an investment in Nike? RECOMMENDATION: should buy NIKE stock. NIKE stock price should be $58. 22 under the condition WACC, 9. 26%. Currently Nike stock is $42. 09. Now Nike stock is under value by $58. 22 – $42. 09 = $16. 13 per share. Works Referenced Investopedia, ND. M&A, Preferred Shares, Investopedia. [Online] Available at: http://www. investopedia. com/terms/w/wacc. asp [Accessed 1 April 2013].