# Nike Inc: Cost of Capital

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• Published : December 16, 2012

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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

* 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%