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?
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike?
Nike, Inc. NorthPoint Group Investment Decision
Current share price of USD 42.09 Declining market share for the period 1997-2000 Strategy for revitalizing the company under consideration Plan to boost revenue and optimize costs Highly experienced management team
Mutual fund management firm Emphasis on large-cap value stocks Has been outperforming the market for the past 18 months Kimi Ford – portfolio manager seeking to identify undervalued stocks, consistent with the fund’s investment strategy
Stock valuation based on forecasting future cash flows over a ten year period Discounting the UFCFF using a predetermined WACC value Calculating the discount factor based on the CAPM approach Considering sensitivity analysis
Understanding the WACC
The Weighted Average Cost of Capital is the interest rate (minimal return) at which investor-supplied capital (equity and interest bearing loans) has been provided. Therefore, it is the weighted average minimum expectation, which shareholders and creditors require for their respective investments made with the company under consideration. The WACC reflects both, the cost of equity and the cost of debt. Different sources of funds have different costs and therefore, depending on the capital structure of the organization, the weightings of debt and equity are calculated and assigned. The WACC is calculated using the following equation:... [continues]
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