Nike Case - Hbr

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NIKE Case Write-Up

1) What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanne Cohen’s WACC calculations? Why or why not?WACC, the weighted average cost of capital, which is the minimum return required by the finance providers for investing in an asset, project or the entire company. It needs to reflect the capital structure used to finance the investment. WACC is also used as the discount rate to appraise new investments for a company. Using WACC we can calculate the interest a company has to pay on the finances it makes. A firm’s WACC is the overall required return on the firm as a whole and used by the firm to determine the economic condition of the company for near future opportunities. We do not agree with Joanne Cohen’s WACC calculations because of three factors: a) For Cost of Debt, she used the book value of interest expense divided by the average book value of debt, which is wrong. Cost of debt is the actual yield that NIKE is paying on their issued debt (bonds) on the market. b) For Cost of Equity, Joanne is using the yield rate of 20-year treasury bonds, but her projections of cash flows are done for 10 years, so she should be using the 10-year treasury bonds rate. c) For WACC, Joanne calculating the weights of cost and debt using book values, but this is wrong; Joanne should be using the market values of both equity and debt. However, with the information given in the case she can only determine equity’s market value, because the case is not presenting how much debt has been issued by Nike, to calculate the market value of debt, but doing it this way will give Joanne a better estimate of the real market weights. 2) If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. After modifying the problems we observed with Joanne’s calculations, we presented the following reviewed results for Nike’s WACC:

- Cost of Debt: Calculated with the...
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