The Weight Average Cost of Capital (WACC) is the firm’s cost of capital. We can think of WACC as an average representing the expected return on all of the companies’ securities. It is an extremely important number for both corporations and usually financials advisors. Corporations use this number as a minimum for evaluating their capital projects or investments. So if for example the WACC of a firm is 10% and the return on investing in a project is 4.5%, then the company would not invest in that particular project. The company in this particular scenario would at least have to get a return of 10% or more to invest in a project. I agree with Johanna Cohen’s estimates as she did the calculations right because I went over them. She also used the cost of debt after -tax as corporations usually do. I calculated the Cost of Equity using the CAPM by calculating it to be 5.870%. I choose my market risk as 6%, because most corporations 37% had used a market risk rate of 5-6%. I choose the upper limit just to be conservative and not take the lower one in case it has been too optimistic. I also choose the higher market risk rate of 6% since the S&P was down 7.3% overall for the year. I choose the average beta of Nike over the last six years which was 0.80%. The risk free rate in all my textbooks usually use is a risk free rate of T-bills but corporations use 10-year treasuries 33% of the time, and also choose 10-30 year treasuries 33% of the time. By looking at the above number I thought using a 10 yeartreasury which currently had a yield of 5.39% was the best option available. K(cost of Equity)=RF+Beta(RM-RF)
Therefore the cost of equity is 5.870%
For the dividend discount model the rate of growth is zero. Although (exhibit4) states that the value line forecast of dividend growth from 98-00 to ’04-’06 is 5.50% the total dividend paid in 1997 was 0.40 cents, but from 1998 to 2000 the dividend has been constant at 0.48...