Joanna began her calculation of Nike’s WACC by finding the necessary weights of debt and equity to be used. To begin, Joanna found Nike’s debt by combining the book values of current long-term debt, notes payable, and long-term debt, which were all found on Nike’s balance sheet. The values were $5.4 million, $855.3 million, and $435.9 million respectively. This calculation gave Nike a total debt of $1,296.9 million. To find Nike’s equity, Joanna used the book value of total shareholders’ equity which was also found on the balance sheet. The value was $3,494.5 million. Therefore, Joanna found Nike’s debt plus equity to be $4,791.4 million. Dividing the values for debt and equity each by $4,791.4 million gave Joanna the weights to be used in the WACC formula. Debt was weighted as 27% and equity as 73%.

Joanna then proceeded to calculate Nike’s costs of debt and equity. She found Nike’s cost of debt by dividing total interest expense, which was found on the income statement, by her previous calculation for debt. Nike’s total interest expense was $58.7 million, so their cost of debt was found to be 4.3%. Joanna used a tax rate of 38% in her calculations, making Nike’s cost of debt after tax to be 2.7%. Joanna decided to use the CAPM model in her calculation of Nike’s cost of equity. She used the risk-free rate of 5.74% on a 20-year Treasury bond, the geometric mean for market risk premium from 1929 to 1999 which was 5.9%, and Nike’s average beta from 1996 to 2001, which was 0.80 to make her calculations. Using these values, she obtained a cost of equity of 10.5%. Joanna then took the weights and costs of debt and equity that she found and calculated Nike’s WACC to be 8.4%.

Joanna made several errors in her calculation of Nike’s WACC. To begin, she used book values when finding Nike’s debt and equity rather than market values. If markets are efficient, market values will equal present value of cash flows. Book values, on the other hand, represent...

...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 7.17%. A tax rate of 38% is applied since the federal...

...ARCHITECTURE
The problems to estimate the cost of capital
Before starting to describe the problems associated to the estimation of the cost of
capital, it is extremely relevant to describe its meaning: according to Investopedia, it is “the
cost of funds used for financing a business”. In order to carry out this process, the companies
can only be financed through equity; only through debt; or using a “combination of debt and
equity” - in this particular case it is a “overall cost of capital derived from a weighted average of
all capital sources, widely known as the weighted average cost of capital (WACC) (...)”
(Investopedia, 2013). The estimation of the cost of capital depends on several factors, such as
the “operating history, profitability, credit worthiness, etc.”. It means, of course, the most recent
companies will face higher costs of capital because their risk is higher when compared to solid
companies (Investopedia, 2013).
It is now important to describe a few and the most important problems regarding the
estimation of the cost of capital:
(i) Assumptions about the costs of equity and debt: these assumptions deeply affect
“the type and the value of the investments a company makes.” (Jacobs and
Shivdasani , 2012). It will make the managers decide whether they invest or not in a
project and also if a company will be successful financially....

...CapitalAssetPricingModel (CAPM): Pros and Cons.
CAPM defines the relationship between risk and return. The premise of the model is that the expected investment return varies in direct proportion to its risk, i.e., the riskier the investment - the higher the return you should expect.
Shows:
• how much risk you are taking when investing in an instrument?
• whether the instrument is rightly priced
• whether you are getting sufficient return for the risk you are taking
CAPM calculates the risk-adjusted discount rate with the risk-free rate, the market risk premium, and beta (mathematical formula):
Return (R) = Rf + beta x (Rm - Rf)
Rf is the rate of risk-free investments
Beta - the risk of loss associated with your investments.
Rm is the expected market return.
(Rm-Rf) – market risk premium
beta x (Rm - Rf) – risk premium of specific company
Investments are good if the expected return from the investment equals/exceeds required return.
Market Risk Premium [Rm-Rf]
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk
Its size depends on the perceived risk of the overall stock market and investors’ degree of risk aversion
Varies across time. Usually ranged between 4-8%
BETA in CAPM measures a stock’s degree of systematic or market risk. It can also be thought of as the stock’s contribution to the risk of a...

...CAPM: THEORY, ADVANTAGES, AND DISADVANTAGES
THE CAPITALASSETPRICINGMODEL RELEVANT TO ACCA QUALIFICATION PAPER F9
Section F of the Study Guide for Paper F9 contains several references to the capitalassetpricingmodel (CAPM). This article is the last in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. The first article, published in the January 2008 issue of student accountant introduced the CAPM and its components, showed how the model can be used to estimate the cost of equity, and introduced the asset beta formula. The second article, published in the April 2008 issue, looked at applying the CAPM to calculate a project-specific discount rate to use in investment appraisal.
CAPM FORMULA The linear relationship between the return required on an investment (whether in stock market securities or in business operations) and its systematic risk is represented by the CAPM formula, which is given in the Paper F9 Formulae Sheet: E(ri) = Rf + βi(E(rm) - Rf) E(ri) = return required on financial asset i Rf = risk-free rate of return βi = beta value for financial asset i E(rm) = average return on the capital market The CAPM is an important area of financial management. In fact, it has even been suggested that finance only became ‘a fully-fledged, scientific...

...CapitalAssetPricingModelCapitalAssetPricingModel (CAPM)
Capital market theory extends portfolio theory and develops a model for pricing all risky assets. It is an equation that quantifies security risk and defines a risk/return relationship
Capitalassetpricingmodel (CAPM) will allow you to determine the required rate of return for any risky asset
Implications of the CAPM:
CAPM indicates what should be the expected or required rates of return on risky assets
This helps to value an asset by providing an appropriate discount rate to use in dividend valuation models
You can compare an estimated rate of return to the required rate of return implied by CAPM - over/under valued ?
Assumptions of the CAPM
1. All investors are Markowitz efficient investors who want to target points on the efficient frontier.
2. Investors can borrow or lend any amount of money at the risk-free rate of return
3. All investors have homogeneous expectations;
4. All investors have the same one-period time horizon such as one-month, six months, or one year
5. All investments are infinitely divisible, which means that it is possible to buy or sell fractional shares of any asset...

...Nike, Inc.: Cost of Capital
Case 15
Financial Administration
FINC 5713-180
Team 1
Fall 2013.
October 8, 2013.
Introduction
Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shares from Nike, inc even if it’s share price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the decline in the stock market over the last 18 months. Kimi therefore surveyed the results of Nike’s fiscal-year 2001which had been revealed a week earlier.
Issues that caused a decline in market sales as revealed by the management of Nike
1. Revenues since 1997 had stopped growing but remained around $9.0 billion.
2. The net income had fallen from $800m to $580m a decline of $220 million.
3. Nike’s market share in the U.S. athletic shoe industry had fallen from 48 percent in 1997 to 42 percent in 2000 (6% decline)
4. The issue of Supply-chain and strong dollar exchange rate also affected the revenue negatively.
Nike’s Strategic plan to address the above issues
1. Increase revenues by developing more athletic-shoe products in the mid-priced range.
2. Push its apparel line which had performed tremendously well.
3. Exert more expense control on the cost side.
4. Nike’s executives expressed their interest to continue with...

...Edward C. La Victoria November 18, 2011
MBA – 1 WAC
Case: Nike, Inc.: Cost of Capital
I. Point of View
- Kimi Ford, portfolio manager at NorthPoint Group, a mutual-fund management firm.
II. Problem
Should Kimi Ford proceed to buy shares from Nike, Inc.? Or not?
III. Objective
This case analysis aims to increase the earnings of NorthPoint Group which, at the end of June 2001 stood at 6.4%.
IV. Areas of Consideration
1. On July 5,2001, Kimi Ford pore over analysts’ write-ups of Nike, Inc..
2. Nike’s share price had declined significantly from the beginning of the year. But Ford was considering buying some share for the fund she managed.
3. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1%. At the end of June 2011, the fund’s year to date returns stood at 6.4% versus -7.3% for the S&P 500.
4. On June 28, 2001, Nike held an analysts’ meeting to disclose its fiscal-year 2001 results and to communicate a strategy for revitalizing the company.
5. Since 1997, Nike’s revenue had plateaued at around $9 billion, while net income had fallen from almost $800 million to $500 million. Nike;s market share in US athletic shoes had fallen from 48%, in 1997, to 42% in 2000.
6. At the...

...WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65 04/15/2018 499
5.88 06/15/2019 600
7.10 04/15/2028 396
6.50 04/15/2038 400
2) From finance.yahoo.com,
• The most recent (Oct 30 2009) stock price (Po) = $14.45
• Market value of equity or market capitalisation = $28,260,000000
• Shares outstanding (28,260,000,000/14.45) = 1,955,709,343
• No dividend is paid recently. In this case, the dividend discount model cannot be used
• The three-month treasury bill yield = 0.03%
Cost of Equity
Risk free rate (Rf)= 0.03%
Systematic risk of Equity (Beta, BE) = 1.36
Assuming market risk premium = 8.6%
Using the CapitalAssetPricingModel (CAPM),
Cost of equity (RE) = Rf + BE(RM - Rf)
Where,
RM is expected return on the overall market
(RM - Rf) is the market risk premium
Cost of equity (RE) = 0.0003 + 0.086 x 1.36
= 0.1173 = 11.73%
Therefore, the cost of equity is 11.73%
3) Cost of Debt
From www.nasdbondinfo.com, the yields to maturity (YTM)...

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