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...

...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...

...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...

...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...

...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
Capitalassetpricing...

...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...

...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...

... 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...

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