WACC Calculation Using Book Values

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Calculate WACC using book values:
The weight of debt is calculated by adding the current portion of long-term debt, notes payable and long-term debt, and dividing it by the sum of debt and equity. $5.4 + 855.3 + 435.9 = $1,296.6$1,296.6 / (1,296.6 + 3,494.5) = .27 = 27% The weight of equity is calculated by dividing the total shareholder equity by the sum of debt and equity. $3,494.5 / (1,296.6 + 3,494.5) = .73 = 73%

Cost of Debt
To find the cost of debt I subtracted the tax savings from the interest rate on debt. .045(1 - .38) = 2.8%

Cost of Equity
In order to find the cost of equity I used the CAPM approach. I used the yield on 20-year U.S. Treasuries as the risk-free rate, 5.74%. To estimate the market risk premium I used the arithmetic mean of 7.50%. I used Nike's average beta, 0.80. .0574 + (.075 - .0574).8 = 7.1%

WACC = KdWd(1 - T) + KeWe
WACC = (.028 x .27) + (.071 x .73) = 5.9%

Calculate WACC using market values:
The weight of debt is calculated by adding the current portion of long-term debt, notes payable and long-term debt, and dividing it by the sum of debt and equity. $5.4 + 855.3 + 435.9 = $1,296.6$1,296.6 / (1,296.6 + 11,427.43) = .10 = 10% The weight of equity is calculated by dividing the market value of equity (price per share x # shares outstanding) by the sum of the market value of debt and equity. $42.09 x 271.43 = $11,427.43$11,427.43 / (11,427.43 + 1,296.6) = .90 = 90%

Cost of Debt
In order to calculate the cost of debt I used the yield to maturity as the rate of return the existing bondholders expect to receive. To find the after tax cost of debt I multiplied the rate of return by the tax rate. .14(1 - .38) = .0868 = 8.7%

Cost of Equity
In order to find the cost of equity I used the CAPM approach. I used the yield on 20-year U.S. Treasuries as the risk-free rate, 5.74%. To estimate the market risk premium I used the arithmetic mean of 7.50%. I used Nike's average beta, 0.80. .0574 + (.075 - .0574).8 = 7.1%...
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