Book value vs. Market value
While calculating the Nike’s cost of capital using both the book value (Exhibit 1.1) and the market value (Exhibit 1.2), I could notice the mistake Cohen made finding the equity value. Cohen used the book value to reflect equity value. Although the book value is an accepted measure to estimate the debt value, the equity’s book value is an inaccurate measure of the value perceived by the shareholders. Since Nike is a publicly traded company, market value is the better method in reflecting Nike’s equity value.

Cohen’s book value of equity is the total shareholder’s equity in the balance sheet, $3494.5. The market value of equity on the other hand, is $11427; computed using stock price X number of shares outstanding ($42.09*271.5 million shares), which is also commonly exercised computing market capitalization of a company in an industry. The book value of equity used by Cohen is very different from the market value of equity. Therefore the weight of debt and equity also differ greatly. Cohen found that Nike is financed by 27% on debt and 73% on equity, but using the market value to better reflect Nike’s debt and equity, I found that Nike is financed by 10.19% on debt and 89.81% on equity. The differences are bigger than it looks, as we are talking about millions of dollars being calculated inaccurately, so it is important for portfolio managers like Kimi Ford to carefully assess the assumptions that are needed to calculate the cost of capital of Nike.

Cost of Debt and Equity
Cohen’s calculation for finding the cost of debt for Nike was “total interest expense divided by average debt balance”. I believe this isn’t a good enough calculation because the investors want to know the cost of debt on new debt, not on already outstanding debt. So to calculate a better cost of debt, I used the 20-year Nike Inc. debt with 6.75% coupon paid semi-annually (Exhibit 1.2) to find the yield to maturity. I took an...

...Cost of Capital
Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. Thecost of capital in operational terms refers to the discount rate that would be used in determining the present value of the estimated future cash proceeds and eventually deciding whether the project is worth undertaking or not. It is defined as "the minimum rate of return" that a firm must earn on its investment for the market value of the firm to remain unchanged.
Basic Aspects of concept of Cost of capital :
here are three basic aspects of concept of cost. They are:
* It is not a cost as such.
* It is the minimum rate of return.
* It comprises the following 3 components:
* Return at Zero risk level – This refers to the expected rate of return when a project involves no risk whether business or financial.
* Premium for business risk – The term business risk refers to the variability in operating profit due to change in sales. The concept is...

...ogCost of capital
First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part
The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million in year2009.also we can see the share price started year2010 with equal to 180,168,300 and ended the year with 143,885,400 this time it’s showing decreasing number not increasing as usual we need to look to the property plant and equipment its percentage increased as it was 69.7% in year 2009 to 70.3% in year 2010,we can have a look to the receivables and prepayments and this was higher in year 2009 with 13% than it was 2010 with 10.4% .the inventories percentage already decreased from year 2009 to 2010 as we see it was 0.2%in year2009 then it became 0.1% .we don’t need to forget about looking to the shareholders equity as it was 3,,641 million in year 2010 and was lower in the year of 2009 with 2,621 million and it was higher in year 2009 than it was in year 2009,the total assets were increased as we see it was 11,398 in year 2009 and it was 13,240 in year 2010 ,when we look to the revenue we can find that it’s as other equities increasing in a great way as it was 3,133million...

...What’s your real cost of capital?
By James J. McNulty, Tony D. Yeh, William s. Schulze, and Michael H. Lubatkin
Harvard Business Review, October 2002
Issue of the article: valuing investment projects
Number of pages: 12
Daniel Miravet Campos
Part 1. Executive summary
This article is fundamentally based on the exposition of a new method to calculate the cost of capital for a company (MCPM), to meet the inefficiencies of the current one (CAPM).
In valuing any investment project or corporate acquisition, executives of a company must compare the cost that operation would require with its expected future cash flows. To do so, they must discount those future cash flows with a specific rate in order to make the comparison meaningful. This is what we know as cost of equity capital, and determining that discount rate is a very important task for the managers of a company, since applying a too high or too low rate will have significant effects on estimating the project’s or company’s value.
The traditional approach to evaluating capital investments is to apply the capital asset pricing model (CAPM), which has remained practically unchanged for 40 years.
This standard formula states that a company’s cost of capital is equal to the risk-free rate of return plus a premium (historical difference between the...

...equipment and other assets, managers must know the cost of obtaining funds to acquire these assets. The cost associated with different sources of funds is called the cost of capital. . If the business earns more than its cost of capital, the market value of the business will increase. Likewise, if returns on long-term investments are below the cost of capital, market values will decline. Therefore, how we manage capital is extremely important to fulfilling the basic objective of increased shareholder value.
This report is basically concentrated on the topic of “Firm & Industry cost of capital”. And then there is an empirical analysis of cost of capital on pharmaceutical industry of Bangladesh by using the concept cost of capital & Statistical model. In Bangladesh the pharmaceutical sector is one of the most developed hi-tech sectors is contributing in the country's economy. There will be an extensive analysis on the pharmaceutical firm’s capital structure, their dividend payment pattern, their ROE in comparison with cost of equity and determining the factor that influencing the pharmaceutical company’s cost of capital largely.
BACKGROUND OF THE REPORT
Cost of capital is a very...

...is cost of capital?
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Importance
The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the cost that the company has to pay for financing it. Good financial management calls for selection of such projects, which are expected to earn returns, which are higher than the cost of capital. It is therefore, important for the finance manager to calculate the cost of capital, which the company has to pay and compare it with the rate of return, which the project is expected to earn.
In capital expenditure decisions, finance managers go on accepting projects arranged in descending order of rate of return. He stops at the point where the cost of capital equals to the rate of return offered by the project. That is, the finance manager finds out the break-even point of the project. Accepting any project beyond the break-even point will cause financial loss for the...

...8
The Cost of Capital
236
CHAPTER 8—THE COST OF CAPITAL
TRUE/FALSE
1. Capital refers to items on the right-hand side of a firm's balance sheet.
2. The component costs of capital are market-determined variables in as much as they are based on investors' required returns.
3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
4. The cost of issuing preferred stock by a corporation must be adjusted to an after-tax figure because of the 70 percent dividend exclusion provision for corporations holding other corporations' preferred stock.
5. The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock.
6. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
7. The cost of equity capital from the sale of new common stock (ke) is generally equal to the cost of equity capital from retention of earnings (ks), divided by one minus the flotation cost as a percentage of sales price (1 -...

...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 Capital Asset Pricing Model (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,...

...Cost of Capital
Firms need to make capital investment i.e., purchasing fixed assets such as factories, machineries, equipment, etc. After deciding what capital investments to make, they need to decide on the financing – sources of capital. The sources: Long-Term Debt, Common Stock, Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not historical).
Cost of Capital - The rate of return that a firm must earn on its investment projects to maintain its market value and attract funds. It depends on the risk of that investment (use of funds, not source of funds)
1. Cost of Debt (rd) – we use Bonds to represent the cost of long-term debt. Its required rate of return is the yield-to-maturity (YTM) of the bond. After we calculate the rd, we need to find the after-tax cost of debt : rd (after-tax) = rd(1 –T). In finding the YTM, we need to have the bond’s current price. If there is a flotation costs involved in issuing the bond, we need to deduct these costs first to find the net price of the bonds.
(Example: A company wants to sell $10 million worth of 20-year, 9% coupon bonds with a par value of $1,000 each. The firm must sell the bonds for $980 to reflect the market price of other similar bonds. The flotation...