Nike Inc: Cost of Capital

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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

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%

* WACC= (1,296.6/12,724)x4.44% + (11,427.4/12,724)x9.81% = 8.81% + 0.45%
= 9.26%

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

Value per share = $51.04
The...
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