Nike, Inc. : Cost of Capital
1. Do you agree with Joanna Cohen’s WACC calculation?
No, there are several wrong assumptions made by Joanna Cohen in calculating Nike’s WACC: * In estimating the cost of debt, Cohen taking total interest expense for the year 2001 and dividing it by the company’s average debt balance to get 4.3%. Cohen should use YTM of Nike’s bond to calculate the cost of debt. * In estimating the cost of equity, Cohen uses average beta from 1996 to July 2001, 0.80. She should use a beta that is most representative to future beta which is the most recent beta, 0.69. * Cohen uses Nike’s book value of equity $3,494.5. She should use market value of the stocks when calculating the cost of equity

2. Calculate your own WACC!
* Capital Structure
Assumption: Market value of stock
* Debt
Current portion of long term debt$ 5.4
Notes payable 855.3
Long-term debt 435.9
$ 1,296.6
* Equity (current price $42.09 x 271.5 million shares) $ 11,427.4 $ 12,724.0
* Cost of Debt
Assumption: YTM of Nike’s bond
Current price= $95.6
N=20x2=40 (semi-annually)
Payment= -6.75/2= -3.375
Future Value=$100
Semi-annual rate= 33.58% , annual rate= 7.16% =RATE(40,-3.375,95.6,-100) Cost of debt= 7.16%x(1-38%)= 4.44%

* Cost of Equity
Assumption: Current Beta market = 0.69
Risk free (20 year US Treasuries) = 5.74%
Risk Premium = 5.9%
Cost of equity = Risk free + (Beta x Risk premium)
= 5.74% + (5.9%)* 0.69
= 9.81%

3. What should Kimi Ford recommend regarding an investment in Nike? We calculate the NPV of Discounted cash flow using WACC 9.26% Year| 2002| 2003| 2004| 2005| 2006| 2007| 2008| 2009| 2010| 2011| CF| 764.1| 663.1| 777.6| 866.2| 1014| 1117.60| 1275.2| 1351.7| 1483.7| 19571| NPV= $ 13,856.77

...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?
The WACC of a firm is the overall required return on the firm as whole. It is the discount rate to use for cash flows with risk that is similar to the overall firm. The WACC lets you see how much interest the company has to pay for every dollar it finances. The WACC of a firm increases at the Beta and rate of return on equity increases. A decrease in WACC indicates a decrease in valuation and a higher risk. When the capital structure changes, the WACC will change in a U shape pattern. Debt is considered less risky than equity, so equity cost is usually higher than the cost of debt. The lowest WACC is the optimal capital structure.
• Joanna used the book value of equity when she should have used the market value of equity. Which is equal to the number of outstanding shares multiplied by the price. This will change her weight of debt calculation.
• She used the book value of debt, which is ok because it is usually close to the market value.
• The cost of debt she used was the total interest expense for the year divided by the average debt balance. She should have divided the total interest expense by the long term debt of the company.
• The...

...evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market.
Ford has done a significant amount of research through analysts’ reports, which had mixed reviews. She found no clear guidance from the analysts and decided to develop her own discounted cash flow forecast to come to a conclusion. Her forecast showed that Nike was overvalued at its current share price causing a discount rate of 12%; however, a quick sensitivity analysis showed that Nike was undervalued at a discount rate below 11.17%.
Ford then asked her assistant, Joanna Cohen, to estimate Nike’s cost of capital, which, per Cohen’s analysis, came to 8.4%.
Background
The cost of capital is the minimum return that a company should make on an investment or the minimum return necessary for investors to cover their cost. Two main factors of the cost of capital are the cost of debt and the cost of equity.
The capital used for funding a business should earn returns for the investors who risk their capital. For an...

...Executive summary
In this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of NikeInc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost ofcapital (WACC).
In our analysis, we examine why WACC is important in decision making and we show how WACC for NikeInc. is calculated correctly. Also, we calculate the company's cost of equity using three different models: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price), we analyze their advantages and disadvantages and finally we conclude whether or not an investment in Nike is recommended.
Our analysis suggests that NikeInc.'s common stock should be added to the North Point Group's Mutual Fund Portfolio.
I. The Weighted Average Cost of Capital and its Importance for NikeInc.
The Weighted Average Cost of Capital (WACC) is the average of the costs of a company's sources of financing-debt and equity, each...

...1. Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital.
Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used book equity, which was $3,494,500,000. Since Nike is a publicly traded company, the stock price should be multiplied by the number of shares outstanding in order to get the true equity of the firm. 271,500,000 multiplied by $42.09, would give you $11,427,435,000 in equity.
In Ms. Cohen’s calculation debt was 27% of total financing and equity was 73%. When using market value for equity those numbers change to 10.2% for debt and 89.8% for equity.
2. Using the following numbers and inputs, our WACC is 9.53%:
To calculate the cost of debt the yield of Nike’s publicly traded debt is utilized:
● N = 40 (semi-annual coupon, 2 x 20)
● PV = $95.60
● PMT = 3.375 (semi-annual coupon, half of 6.75)
● FV = 100 (Amount of debt in future)
Inserting the numbers above in our calculations result in 3.583724 for the I/YR which is multiplied by two to get an annual rate of...

...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?
WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an investment is worth it or not based on the weights of debt and equity.
Why WACC is important
* To decide what projects to accept or reject. Rate of return should be equal to or greater than company cost of capital
* Knowing cost of debt and cost of equity helps a company determine how they should be structured and whether more financing should come from equity or debt
I do not agree with Cohen’s calculation for WACC. While some of her calculations were good, I think that there were some that she could have used different numbers and rates to come up with more accurate numbers.
WACC=(E/(D+E)) Ke + (D/(D+E)) Kd (1-t)
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions
Cost of debt-based on yield to maturity
PMT= 100(.0675)=6.75...

...NikeCost of Capital Analysis
October 22, 2010
1
I. Introduction
In this case analysis Kimi Ford, a portfolio manager for a large cap value mutual fund, NorthPointGroup is considering adding shares of Nike, Inc., an athletic shoe manufacturer as a new position in her fund. On July 5, 2001, Nike's share price had declined significantly since the beginning of the year. Although the market in general had declined over the last 18 months as well, NorthPoint Large-Cap Fund had firmly out- performed the market. Kimi had read mixed reports from the analysts, and decided to do her own discounted cash flow forecast for Nike, in order to come to a clearer conclusion. Her forecast showed that at discount rates below 11.17% Nike was undervalued. She asked her assistant to calculate cost of capital, and her assistant's analysis of the weighted average cost of capital was given in a memo to Kimi. On a closer look at her assistant’s analysis, the numbers used for the analysis appear to be wrong based on several of her assumptions in the calculation. My analysis of the WACC numbers, and the risks and return for potentially purchasing Nike shares for the portfolio follow in the report below.
II....

...Nike, IncCost of Capital
NorthPoint Large Cap Fund was considering whether to buy Nike’s stock or not. Nike was experiencing declines in sales growth, declines in profits and market share. However, Nike decided it would increase exposure in mid-price footwear and apparel lines, and it also commits to cut down expenses. The market responded with mixed signals to Nike’s changes. Kimi Ford, the portfolio manager at NorthPoint, did a cash flow estimation, and ask her assistant, Joanna Cohen to estimate the cost of capital.
The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost. Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC.
There are four main issues: a) If Cohen should estimate different costs of capital for the footwear and apparel divisions or use a single one instead. I agree with the use of the single cost of capital. It is sufficient for this analysis, since Nike’s business segments have very similar risks.
b) Calculating the Cost of Capital WACC:...

...NikeInc: Cost of CapitalNike was founded in 1964 and was formerly known as Blue Ribbon Sports. Track star Bill Bowerman and his coach Philip Knight created Blue Ribbon Sports which later became Nike in 1978. The name Nike comes from the Greek Goddess of victory. In 1966 the first retail store was opened in Santa Monica, Ca. By 1980, Nike had reached 50 percent of market share in the U.S. athletic shoe market. This is also when Nike went public with two million shares of stock. Throughout the 1980’s Nike expanded into many other sports and regions around the world. In 1981, Nike established factories were established in China.
Nike now has more than 500 locations around the world, and still remains the world’s largest athletic shoe supplier. Most of Nike’s factories are located in Asia. Nike also sells its products to 25,000 retailers in the U.S. and 140 countries worldwide. Nike has produced several products such as: Nike Golf, Nike Pro, Nike +, Air Jordan, Nike Skateboarding, Starter, and subsidiaries including Bauer, Cole Haan, Hurley, Umbro, and Converse. Nike has sponsored many athletes and sports teams around the world. Such athletes are Tiger Woods, Lebron James, Lance Armstrong, Serena Williams,...

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