Nike Case

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Any company’s assets are either financed by its debt or by its equity. The Weighted Average Cost of Capital is the average costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances. Basically, the WACC is the minimum required return that the company must earn to satisfy its creditors, owners, and other providers of capital, or they will invest in another company 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 Nike debt. Another issue that should be addressed is the calculation of the equity cost of capital. Using CAPM, Cohen took a 20 year Treasury bond as her risk free, the average Beta for the last 6 years, and a geometric mean for market premium. Also, Cohen calculated the book value of equity and debt instead of using market values. In my analysis, I will argue about choosing different numbers than Cohen to get a more accurate WACC. For the calculation of debt cost of capital, I used the current yield on publicly traded Nike debt to get a market value for the debt and not the book. Having the 6.75% coupon rate paid semiannually, 20 years to maturity, and the current price of $95.60, the debt cost of capital would be estimated at 7.17%. for the calculation of the equity cost of capital, I used CAPM. The three components are the risk free premium, the Beta value, and the market risk premium. I chose a 3-month yield on Treasury bills as the risk free premium since it is the safest and...
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