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:

...Nike, Inc.: Cost of Capital
Case 15
Financial Administration
FINC 5713-180
Team 1
Fall 2013.
October 8, 2013.
Introduction
Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm, is considering to buy some shares from Nike, inc even if it’s share price had declined from the beginning of the year, for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the decline in the stock market over the last 18 months. Kimi therefore surveyed the results of Nike’s fiscal-year 2001which had been revealed a week earlier.
Issues that caused a decline in market sales as revealed by the management of Nike
1. Revenues since 1997 had stopped growing but remained around $9.0 billion.
2. The net income had fallen from $800m to $580m a decline of $220 million.
3. Nike’s market share in the U.S. athletic shoe industry had fallen from 48 percent in 1997 to 42 percent in 2000 (6% decline)
4. The issue of Supply-chain and strong dollar exchange rate also affected the revenue negatively.
Nike’s Strategic plan to address the above issues
1. Increase revenues by developing more athletic-shoe products in the mid-priced range.
2. Push its apparel line which had performed tremendously well.
3. Exert more expense control on the cost side.
4....

...evaluating Nike, Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market.
Ford has done a significant amount of research through analysts’ reports, which had mixed reviews. She found no clear guidance from the analysts and decided to develop her own discounted cash flow forecast to come to a conclusion. Her forecast showed that Nike was overvalued at its current share price causing a discount rate of 12%; however, a quick sensitivity analysis showed that Nike was undervalued at a discount rate below 11.17%.
Ford then asked her assistant, Joanna Cohen, to estimate Nike’s cost of capital, which, per Cohen’s analysis, came to 8.4%.
Background
The cost of capital is the minimum return that a company should make on an investment or the minimum return necessary for investors to cover their cost. Two main factors of the cost of capital are the cost of debt and the cost of equity.
The capital used for funding a business should earn returns for the investors who risk their capital. For an...

...Executive summary
In this report we focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of NikeInc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost ofcapital (WACC).
In our analysis, we examine why WACC is important in decision making and we show how WACC for NikeInc. is calculated correctly. Also, we calculate the company's cost of equity using three different models: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price), we analyze their advantages and disadvantages and finally we conclude whether or not an investment in Nike is recommended.
Our analysis suggests that NikeInc.'s common stock should be added to the North Point Group's Mutual Fund Portfolio.
I. The Weighted Average Cost of Capital and its Importance for NikeInc.
The Weighted Average Cost of Capital (WACC) is the average of the costs of a company's sources of financing-debt and equity, each...

...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?
The WACC of a firm is the overall required return on the firm as whole. It is the discount rate to use for cash flows with risk that is similar to the overall firm. The WACC lets you see how much interest the company has to pay for every dollar it finances. The WACC of a firm increases at the Beta and rate of return on equity increases. A decrease in WACC indicates a decrease in valuation and a higher risk. When the capital structure changes, the WACC will change in a U shape pattern. Debt is considered less risky than equity, so equity cost is usually higher than the cost of debt. The lowest WACC is the optimal capital structure.
• Joanna used the book value of equity when she should have used the market value of equity. Which is equal to the number of outstanding shares multiplied by the price. This will change her weight of debt calculation.
• She used the book value of debt, which is ok because it is usually close to the market value.
• The cost of debt she used was the total interest expense for the year divided by the average debt balance. She should have divided the total interest expense by the long term debt of the company.
• The...

...NikeInc.: Cost of Capital
The Weighted Average Cost of Capital (WACC) is the overall required rate of return on a firm as a whole. It is important to calculate a firm’s cost of capital in order to determine the feasibility of a particular investment for a firm.
I do not agree with Joanna Cohen’s WACC calculation. She calculated value of equity, value of debt,cost of equity, and cost of debt all incorrectly. For value of equity, Joanna simply used the number stated on the balance sheet instead of multiplying the current stock price by the number of outstanding shares. The correct calculation is $42.09 x 271.5M = $11,427.435M. The correct method of calculating the value of debt is to multiply the price of publicly traded bonds by the amount of debt outstanding. This calculation results in 95.60% x $1296.6M = $1,239.550M. The sum of debt and equity is equal to $12,666.985M. Therefore, the weight of equity is 0.902 and the weight of debt is 0.098. In order to determine the cost of debt, the yield to maturity of the debt must be calculated. Using a financial calculator (N=30, PV=-$95.60, PMT=$3.375, FV=$100), the YTM is equal to 7.24%. This is the cost of debt. The cost of equity can be determined using the Capital Asset Pricing Model (CAPM). Joanna was correct in using the...

...NikeInc: Cost of CapitalNike was founded in 1964 and was formerly known as Blue Ribbon Sports. Track star Bill Bowerman and his coach Philip Knight created Blue Ribbon Sports which later became Nike in 1978. The name Nike comes from the Greek Goddess of victory. In 1966 the first retail store was opened in Santa Monica, Ca. By 1980, Nike had reached 50 percent of market share in the U.S. athletic shoe market. This is also when Nike went public with two million shares of stock. Throughout the 1980’s Nike expanded into many other sports and regions around the world. In 1981, Nike established factories were established in China.
Nike now has more than 500 locations around the world, and still remains the world’s largest athletic shoe supplier. Most of Nike’s factories are located in Asia. Nike also sells its products to 25,000 retailers in the U.S. and 140 countries worldwide. Nike has produced several products such as: Nike Golf, Nike Pro, Nike +, Air Jordan, Nike Skateboarding, Starter, and subsidiaries including Bauer, Cole Haan, Hurley, Umbro, and Converse. Nike has sponsored many athletes and sports teams around the world. Such athletes are Tiger Woods, Lebron James, Lance Armstrong, Serena Williams,...

...Case Study –Nike, Inc.: Cost of Capital
FIN202a-Spring 2011
1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.
WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.
It is a critical input for evaluating investment decision, and typically the discount rate for NPV calculation. And it serves as the benchmark for operating performance, relative to the opportunity cost of capital employed to create value.
Algebraically, it is given by
WACC = [E/(E + D)] *re + [D/(E + D )]*rd * (1-t)
Where WACC= Weighted Average Cost of Capital
re = cost of equity
rd = cost of debt
E = market value of equity
D = Market value of debt
t = tax rate
2. Calculate cost of equity using the Capital Asset Pricing Model (CAPM).
Given are the values:
Rf = 5.74%
β = 0.8
Rm – rf = 5.9%
Required to calculate the cost of equity re; using CAPM.
It follows that from our formula
Re = rf + β (Rm –rf)
= 5.74% + 0.8 (5.9%)
= 10.46%
Assumptions:
We decided to use the 20 year treasury risk free rate value of 5.74% because it is a conservative value for such a period of time; and...

...financials of NikeInc. to consider buying shares for the NorthPoint Large-Cap Fund that she managed. A week prior, NikeInc. held an analysts’ meeting to share their 2001 fiscal results and develop a strategy to revitalize the company.
II. Background of Firm
Nike’s revenues since 1997 had grown from $9 billion, while net income had fallen $220 million. A study written by Douglas Robson printed in Business Week revealed that Nike’s market share in the U.S. athletic shoe industry had fallen from 48 percent to 42 percent since 1997. In addition, supply-chain issues and the effects of a strong dollar negatively affected revenues. In the meeting, management planned to increase revenues by developing athletic-shoe products in ranges varying between $70-$90 and push their apparel line. Nike’s executives expressed that the company would still continue with a long-term revenue growth target of 8-10 percent and earnings-growth target above 15 percent.
III. Statement of Situation
After reading all the analysts’ reports, Kimi Ford decided to develop her own discounted-cash-flow forecast to achieve the investment decision for her mutual fund. The forecast showed that at a 12 percent discount rate, Nike’s stock price was overvalued at $4.82 per share. She created a sensitivity analysis, which revealed that Nike’s stock was undervalued at discount rates of less than 11.7 percent. The results concluded from the...

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