Cost of capital denotes the opportunity cost of using capital for a particular investment as oppose to the alternative investment which has similar systematic risk. It is extremely important since it is used in evaluating whether a project is feasible or not in the net present value (NPV) analysis, or in assessing the value of an asset.
WACC (weighted average cost of capital) is the proportional average of each category of capital inside a firm (common shares, preferred shares, bonds and any other longterm debt). WACC is also called required return. The term required return tends to reflect an investor’s point of view, while cost of capital is the same return only from the firm’s point of view. WACC is the rate of return required by the capital provider in exchange for giving up the opportunity of investment in another project or business with similar risk. Therefore, WACC is set by investors, not by managers. It cannot be observed it can only be estimated. I do not entirely agree with Joanna Cohen’s WACC calculation. I believe she made the following mistakes: 1. She is wrong to use book values in debt and equity weights calculations. WACC is market driven. It is the expected rate of return that the market requires to commit capital to an investment. Therefore, the base against which the WACC is measured is market value, not book value. 2. In calculations of the cost of debt she used historical data. She divided the interest expense by the average debt balance. The purpose of WACC is to reflect company’s current and future ability to raise capital. Data used in the case will not reflect future perspectives. Cost of debt should be estimated by yield to maturity of bond. 3. In calculations of the cost of equity the average of betas from 1996 to present is being used. This method of beta estimation seems to be too retrospective. Theory calls for a forwardlooking beta. However since it is unobservable over...
...Nike, Inc.: Cost of Capital
Case14
A Case Brief Submitted to
Submitted by
In Partial Fulfillment of the Requirements for
Date Submitted
September 28, 2011
Summary
This case highlights Kimi Ford, a portfolio manager with NorthPoint Group, a mutualfund management firm. She managed the NorthPoint LargeCap Fund, and in July of 2001, was looking at the possibility of taking a position in Nike...
...that has higher returns. In this case, I will first address the issues with Cohen’s calculation, and then analyze an new WACC to decide whether we should invest in Nike Inc.
Many issues should be addressed regarding Joanna Cohen’s WACC calculation. First, to calculate the debt cost of capital, Cohen divided the total interest expense by the company’s average debt balance. This is an issue because she did not take into account the current yield on publicly traded...
...we used market value based on the share price of Nike on July 5, 2001and number of shares outstanding, which resulted in the weights of debt and equity of 10.2% and 89.8% respectively (see Exhibit 2).
Cost of Debt:
Cost of debt was calculated by Ms. Cohen by finding the historical interest rate of 2.7% and tax rate of 38%. We agree with her estimation of the tax rate of 38%, but calculated a cost of debt of 7.17% based on the market price of Nike bonds and...
...Corporate Finance
Nike, INC: Cost of capital
1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
Definition of WACC (Weighted Average Cost of Capital):
WACC is basically the average of the cost of finance (debt and equity). Since a company’s assets can be financed by debt or equity, WACC can show the averages of the costs involved in the sources of financing....
...NIKE, INC.: COST OF CAPITAL
Professor Meiberger
By Sebastian Gomez
Team 5
Cohort: Front
The portfolio manager for NorthPoint Group, Kimi Ford was deciding if she should pitch in and draw Nike within NorthPoint LargeCap Fund. Nike, which did not have the strongest fiscal year results in 2001, was implementing new strategies to heighten its revenue and income. Kimi Ford, after having carefully read reports by analyst, and their input within...
...
NIKE, INC.: COST OF CAPITAL 





Introduction
Our report aims to help Kimi Ford make a decision on her investment of Nike. We choose WACC as our method to estimate the cost of capital, which can be used as a discount rate to verify whether Nike is correctly valued in current market.
We have mainly four steps to calculate WACC: I. Identify the type of cost of capital; II. Figure out the weights of debt and equity; III....
...Nike Valuation
At North Point Group we believe we have developed the formula for investing success. As you know better than anyone, our Largecap 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...
...provide suggestions to boost revenue. The targets provided by management included longterm revenue growth of 810% and earnings growth above 15%. Kimi Ford, a portfolio manager at 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...
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