Case Study –Nike, Inc.: Cost of Capital
FIN202a-Spring 2011

1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity. It is a critical input for evaluating investment decision, and typically the discount rate for NPV calculation. And it serves as the benchmark for operating performance, relative to the opportunity cost of capital employed to create value.

Algebraically, it is given by

WACC = [E/(E + D)] *re + [D/(E + D )]*rd * (1-t)
Where WACC= Weighted Average Cost of Capital
re = cost of equity
rd = cost of debt
E = market value of equity
D = Market value of debt
t = tax rate

2. Calculate cost of equity using the Capital Asset Pricing Model (CAPM). Given are the values:
Rf = 5.74%
β = 0.8
Rm – rf = 5.9%
Required to calculate the cost of equity re; using CAPM.
It follows that from our formula
Re = rf + β (Rm –rf)
= 5.74% + 0.8 (5.9%)
= 10.46%
Assumptions:
We decided to use the 20 year treasury risk free rate value of 5.74% because it is a conservative value for such a period of time; and having covered such a span of time compensates for volatility. The average beta (β) of Nike firm from 1996-date which is 0.80 appears to be the best for such an analysis, so we adopt it as well.

3. We have discussed in class the dividend discount model (DDM)as an alternative method to calculate cost of equity:

Re = (D1/P0) + g

Re = Cost of equity
D1 = Expected dividends
P0 = Current share price
g = Expected dividend growth rate

Calculate cost of equity using the dividend Discount Model (DDM). Compare your estimate using the dividend discount model to your estimate from the CAPM. Which estimate makes more sense to you?

Re=D1/P0 + g
=D0(1 + g)/P0 + g
= 0.48*(1 + 5.5%)/42.09 + 5.5%
= 6.7%

...NikeInc. Case Number 2
Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum...

...Nike Valuation
At North Point Group we believe we have developed the formula for investing success. As you know better than anyone, our Large-cap fund has exceeded all possible expectations in recent years as it outperformed the S&P 500 by 30% with respect to returns in 2000 and has continued the trend into 2001; as of the end of June 2001 it has already produced returns of 6.4% while the S&P 500 has continued to struggle producing a return of -7.3%. We believe these results...

...NorthPoint Group has been tasked with analyzing Nike and coming up with a valuation for Nike so that her company can decide whether it is a good investment or not. She found that at a discount rate of 12% the company is overvalued, while with a slight decrease in the discount rate, to 11.7% the company is undervalued. In order to value the company correctly an accurate cost of capital must be estimated.
Analysis
An analysis of...

...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...

...Nike, Inc.: Cost of CapitalCase 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...

...Introduction
Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is 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...

...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 of capital...

...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...

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