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Case Overview Nikes share price had declined significantly from the start of the year Since 1997 Nikes revenues had plateaued at around 9 billion while net income had fallen from almost S800 million to 580 million Nikes market share in US athletic shoes had fallen from 48 percent in 1997 to 42 percent in 2000 In addition recent supply-chain issues and the adverse effect of a strong dollar had negatively affected revenue Management revealed plans to address both top-line growth and operating performance To boost revenue the company would develop more athletic-shoe products in the mid-priced segment that it had overlooked in 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 company executives reiterated their long-term revenue growth targets of 8-10 percent and earnings-growth targets of above 15 percent Analysts reactions were mixed Some thought the financial targets too aggressive others saw significant growth opportunities in apparel and in Nikes international businesses Key Issues Nike was overvalued at its current share price of 4209 Nike was under valued at discount rates below 94 percent In order to build clear guidance to reveal their strategies Joanna Cohen must estimate Nikes cost of capital The problem is Joanna Cohen was mistaken in calculating the cost of debt using historical information We must recalculating the cost of debt and determining WACC based on our calculation We must turn to market yields to gauge the cost of debt Cost of Capital The cost of capital acts as a link between the firms long-term investment decisions and the wealth of the owners as determined by investors in the market place It is the magic number that is used to decide whether a proposed investment will increase or decrease the firms stock price Formally the cost of capital is
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