To: Kim Ford
Subject: Nike’s Cost of Capital
I agree with Ms. Ford’s estimate of Nike’s Cost of Capital at 8.4% The WACC is the appropriate method for valuing Nike’s capital. The WACC takes your cost of debt x the percent of capital + CAPM x equity percent of capital and it tells the rate of return the company needs to return based on its capital structure. In my opinion Ms. Ford has correctly assumed Nikes cost of debt and cost of equity. Her projection for cost of debt uses the Japanese yen notes ranging from 2.0%-4.3%. Since she used the higher range of 4.3%, that will eliminate any overly optimistic projections and should leave us with a realistic assumption. Some people can argue that she should of used the multiple costs of capital approach since Nike operates in many different sectors within the sporting apparel industry; however, when you break down their sales into categories like she did it is evident that using the singular approach was adequate for this analysis. CAPM as opposed to the Dividend Discount Model and Earnings Capitalization Ratio, was the appropriate approach to valuing the cost of equity because it more adequately equates for the companies risk and time value of money. The dividend discount model fails to take into account the companies riskiness, and the Earnings Capitalization ratio is too reliant on the company’s debt. The WACC that Ms. Ford calculated is correct in my opinion because she correctly valued the companies cost of debt and she also used the most appropriate method of estimating the cost of equity by using CAPM.
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