If markets are efficient, market values will equal present value of cash flows. Book values, on the other hand, represent
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In Joanna’s memo to Kimi about Nike’s WACC, she calculated it to be 8.3%. She also provided some assumptions she made while developing this WACC. First, she noted that she decided to use a single cost of capital because she did not believe that other segments with Nike were large enough to make a considerable difference on the weights. She determined that Nike’s segments also did not have a significant difference in risk to justify using a multiple cost of capital. We agreed with Joanna and also used a single segment cost of capital. One difference we found between the way Joanna calculated WACC and the way we calculated Nike’s WACC was that she decided to use the book Values of debt and equity whereas we found it more beneficial to use the market values. We decided to use the market values of debt and equity because these values are considered to be long-term values. It is also important to use market value rather than book value because the market value is a better estimate of the total debt and total equity of the firm.…
1. Calculate Nike’s Cost of Capital based on the book values presented in the case.…
The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.…
It is very favorable to see Nike have a debt ratio close to 0 as it shows the company is not taking on too much financial risk. Compared with the industry average, Nike is taking on slightly more risk, although the company is in a good position to do so. Nike’s quick ratio shows their ability to satisfy their liabilities at 1.7 times and with a debt ratio close to 0, they can afford to take on additional financial liabilities to develop their e-commerce sales or invest further in their emerging markets sector to compete against international brands. Comparing Nike against the industry, other companies may not be able to take such risk due to their liquidity restraints, but Nike has the potential to do so if…
In my analysis, I will argue about choosing different numbers than Cohen to get a more accurate WACC. For the calculation of debt cost of capital, I used the current yield on publicly traded Nike debt to get a market value for the debt and not the book. Having the 6.75% coupon rate paid semiannually, 20 years to maturity, and the current price of $95.60, the debt cost of capital would be estimated at 7.17%. for the calculation of the equity cost of capital, I used CAPM. The three components are the risk free premium, the Beta value, and the market risk premium. I chose a 3-month yield on Treasury bills as the risk free premium since it is the safest and…
a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for Asset "i" is 1.2.…
Wanting to add Nike’s share to her portfolio, Kimi Ford asked her new assistant, Joanna Cohen, to estimate Nike’s cost of capital. Cohen, later, came up with the cost of capital of 8.4% that was contradicted to Ford’s cost of capital of 12%.…
1. What is the WACC and why is it important to estimate a firm’s cost of capital? Is the WACC set by investors or by managers?…
Johnson also opened the first retail store in California and is credited with providing Nike with its name. In 1971 the swoosh trademark was created for a minimal fee of only thirty five dollars by a graphic design student named Carolyn Davidson. By 1972, new athletic footwear was introduced by Blue Ribbon Sports and called Nike. The Blue Ribbon Sports Company had business relations with Onitsuka Tiger for nearly ten years and in 1972 the two hit a bump in the road. Due to a dispute over distribution there was an eventual sever in business dealings between the two companies. That same year the Nike line of footwear made its debut in February at a Chicago sporting goods show. At the 1972 Olympic trials Nike “moon shoes” were introduced featuring the new waffle sole. Along with these new shoes, t-shirts were also being worn bearing the Nike logo. This new brand began to spark an interest. Later that year, Nike signed its first endorsement contract with the Romanian tennis star, Ilie Nastase.…
In order to completely analyze Nike and its possible place in the NorthPoint Large-Cap Fund, Ford needs to know Nike’s cost of capital. One of the most useful ways to measure the cost of capital is the weighted average cost of capital (WACC). Theoretically, the optimal capital structure in the mix of types of financing that produces the lowest WACC. WACC is calculated by multiplying the cost of each type of financing a company uses, be it debt or the many types of equity, by their respective weights. It is the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital.…
The purpose of this paper is to provide investors with comprehensive information on Nike, its financial health and activities, its strength and weaknesses, and whether Nike creates value to its shareholders. This paper will analyze Nike's capital structure, scope of international operations, recent stock performance, and dividend policy. We will examine how Nike's international operations are conducted, its criticisms and strengths. Nike's debt ratios, dividend payout ratios, dividend yield, and interest coverage ratios over the previous 5 years will be discussed and compared with industry benchmarks. Its bond ratings and the relation between the operating characteristics and its leverage will also be analyzed.…
Our group was assigned to produce a report on the Nike Inc.: Cost of Capital case study as a component of Financial Engineering assignments. This case study presented a situation where Ms Kimi Ford, a portfolio manager at North Point Group, was considering buying some shares of Nike Inc. for the fund that she was managing. The reason was, after a quick sensitivity analysis of the discounted cash flow forecast, that she learned that Nike was undervalued at discount rates below 11.17%, which would make it beneficial to acquire its shares. In order to make a decision whether to buy Nike’s shares, she needed the estimation of Nike’s cost of capital. Her assistant, Ms Joanna Cohen, performed an estimation of the cost of capital by the end of the day with a result of 8.4%. Our task was to verify whether her estimation was correct and suggest our own proposal of changes.…
I think that Joanna Cohen makes several mistakes while calculating Nike’s WACC. First mistake is her calculation of debt which should be measured according to the market value, not the book value. Joanna calculated debt using the book values of current portion of long-term debt,…
After discounting Nike’s cash flows using the WACC value we calculated, we believe that Nike is undervalued by $2.51 per share of stock. Also, Nike’s terminal value of cash flows is greater than the equity value of the firm. (Exhibit 3). We think that they should invest because the price of Nike’s…
Weight of Debt = Net Debt / (Total firm Value = (Equity + Net Debt))…