Course: FINA 3301
Professor name: Eliot H. Sherman
Nike Cost of Capital Case Assignment 1. Calculate Nike’s Cost of Capital based on the book values presented in the case.
2. Calculate Nike’s Cost of Capital based on the Market Values presented in the case.
3. Evaluate Joanna’s calculation and identify and explain any differences between her calculation and yours.
4. Under what circumstances is using book values the most appropriate basis for calculating the cost of capital? (Your answer should not be focused on the Nike Case.)
5. Under what circumstances is using market values the most appropriate basis for calculating the cost of capital? (Your answer should not be focused on the Nike Case.)
6. Which method is most appropriate in this case? Why did you answer as you did?
7. What would be your recommendation to Kimi Ford?
After tax cost of debt= Current yield to maturity*(1-Tax rate) Based on information from Current Yield on Publicly Traded Nike Debt,
Number of payment periods (N) =25*2=50 years
Present value =$95.6
Yield to maturity= 3.56% (semi-annually), 7.12 %( annually)
After tax cost of debt = 7.12%*(1-38%)= 4.84%
Cost of equity= Market risk free rate* Market risk premium*Beta
Based on information from Current Yields on U.S Treasuries,
20-year current yields should be used as market risk free rate since it has the longest period, which is equal to 5.74%
Based on information from Historical Equity Risk Premiums,
Geometric mean should be used to calculate market risk premium, which is equal to 5.9%
Based on information from Nike Historic Betas
Most recent beta= 0.69
Cost of equity=5.74%*5.9%*0.69=9.81%
Based on information from Exhibit3 (Balance sheet)
Book value of stockholders’ equity= 3494.5
And according to our text book, capital must be provided by investors- interest bearing debt, preferred stock and common equity, accounts payable and accrued should be deducted.