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 20-year yield on U.S. treasuries as her risk-free rate and was also correct in using 5.90% as her risk premium. However, she should have only used the most recent year’s beta instead of using an average of multiple years. The correct calculation is 5.74% + 0.83(5.90%) = 10.64%. This is cost of equity. Using a 38% tax rate, we can now calculate the WACC. WACC = 90.2%(10.64%) + 9.80%(7.24%)(1-38%) = 10.03%

Using the Dividend Discount Model, the cost of equity can be calculated as the sum of the dividend yield and the dividend growth rate. In this case, it is ($0.48/$42.09) + 5.50% = 6.64%. Using the earnings capitalization ratio, the cost of equity can be arrived at by dividing the...

...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...

...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, IncCost of Capital
NorthPoint Large Cap Fund was considering whether to buy Nike’s stock or not. Nike was experiencing declines in sales growth, declines in profits and market share. However, Nike decided it would increase exposure in mid-price footwear and apparel lines, and it also commits to cut down expenses. The market responded with mixed signals to Nike’s changes. Kimi Ford, the portfolio manager at NorthPoint, did a cash flow estimation, and ask her assistant, Joanna Cohen to estimate the cost of capital.
The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost. Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC.
There are four main issues: a) If Cohen should estimate different costs of capital for the footwear and apparel divisions or use a single one instead. I agree with the use of the single cost of capital. It is sufficient for this analysis, since Nike’s business segments have very similar risks.
b) Calculating the Cost of Capital WACC:...

...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,...

...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. Case Number 2
Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to two factors.
The first distinction we have made is in the way in which Cohen calculates the cost of debt. As she stated in her memo, Cohen calculates the cost of debt by taking the total interest expense for the year and dividing it by the company’s average debt balance; whereas we calculated the yield to maturity (YTM) of a twenty year debt using the 6.75% coupon paid semi-annually as seen on the third page in our calculations. The second distinction that was made is Cohen’s use of the book value of equity in determining its percentage of total capital. Cohen’s use of book values gives her an equity weight of 27% and debt weight of capital of 73%. We, instead, calculated the weights of equity based upon the market value of equity, which gave us an equity weight of 89.8% along with a debt weight of 10.2% as we...

...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?
WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an investment is worth it or not based on the weights of debt and equity.
Why WACC is important
* To decide what projects to accept or reject. Rate of return should be equal to or greater than company cost of capital
* Knowing cost of debt and cost of equity helps a company determine how they should be structured and whether more financing should come from equity or debt
I do not agree with Cohen’s calculation for WACC. While some of her calculations were good, I think that there were some that she could have used different numbers and rates to come up with more accurate numbers.
WACC=(E/(D+E)) Ke + (D/(D+E)) Kd (1-t)
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions
Cost of debt-based on yield to maturity
PMT= 100(.0675)=6.75...