Nike, Inc Cost of Capital

Topics: Capital asset pricing model, Stock market, Weighted average cost of capital Pages: 4 (1140 words) Published: June 25, 2012
1.Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital.

Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used book equity, which was $3,494,500,000. Since Nike is a publicly traded company, the stock price should be multiplied by the number of shares outstanding in order to get the true equity of the firm. 271,500,000 multiplied by $42.09, would give you $11,427,435,000 in equity.

In Ms. Cohen’s calculation debt was 27% of total financing and equity was 73%. When using market value for equity those numbers change to 10.2% for debt and 89.8% for equity.

2. Using the following numbers and inputs, our WACC is 9.53%:

To calculate the cost of debt the yield of Nike’s publicly traded debt is utilized:

● N = 40 (semi-annual coupon, 2 x 20)
● PV = $95.60
● PMT = 3.375 (semi-annual coupon, half of 6.75)
● FV = 100 (Amount of debt in future)

Inserting the numbers above in our calculations result in 3.583724 for the I/YR which is multiplied by two to get an annual rate of 7.17%. A tax rate of 38% is applied since the federal rate is 35% and the state rate varies from 2.5% to 3.5%. The debt side of WACC would be as follows:

Kd(1-t) x D/(D+E) 7.17(1-.38) x 1,296.6/(12,724.035) 4.44% x 10.2% = .4529%

We agreed with Ms. Cohen’s results of the CAPM model and used them to calculate the cost of equity. The geometric mean for MRP equaled 5.9%, the average beta for Nike since 1996 was .8, and the 10 year treasury bond for the risk free rate was 5.39%.

Using CAPM, the cost of equity would be as follows:

Ke = Rf + Beta(MRP)...
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