# Finance 3301 Nike S Case Assignment

Powerful Essays
776 Words
Grammar
Plagiarism
Writing
Score
Finance 3301 Nike S Case Assignment
Group: Zhengtian “Darren” Ye, Bohan Li
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?

1.
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
Pmt=-3.375
FV=-\$100
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.

## You May Also Find These Documents Helpful

• Satisfactory Essays

These questions relate to the Midland Energy Resources, Inc: Cost of Capital case. See spreadsheet named: Midland Energy Resources Exhibits.xls.…

• 270 Words
• 2 Pages
Satisfactory Essays
• Powerful Essays

We employed the Capital Asset Pricing Model (CAPM) with this data to find the value the firm to be \$1.69million - \$2.89 million.…

• 4530 Words
• 19 Pages
Powerful Essays
• Satisfactory Essays

What is the present value of a security that will pay \$5,000 in 20 years if securities of equal risk pay 7% annually?…

• 465 Words
• 2 Pages
Satisfactory Essays
• Good Essays

3. Calculate the cost of common stock equity and convert it into the cost of retained earnings and the cost of new issues of common stock.…

• 1840 Words
• 8 Pages
Good Essays
• Good Essays

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…

• 836 Words
• 4 Pages
Good Essays
• Satisfactory Essays

4. Compute BioCom's weighted average cost of capital. Should you use book values or market values for this computation?…

• 255 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

For this you would use the formula of bond rate + risk premium and the middle is 4.…

• 682 Words
• 3 Pages
Satisfactory Essays
• Powerful Essays

Estimates of the cost of capital were used in many analyses within Midland, including asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase decisions. Moreover, depending on correct cost of capital, Midland will be able to make accurate financial forecast on supply, demand, and growth, and will decide their new financial and investment decision on a good direction.…

• 1322 Words
• 6 Pages
Powerful Essays
• Satisfactory Essays

We agreed with Ms. Cohen’s results of the CAPM model and used them to calculate the cost of equity. The geometric mean for MRP equaled 5.9%, the average beta for Nike since 1996 was .8, and the 10 year treasury bond for the risk free rate was 5.39%.…

• 1140 Words
• 5 Pages
Satisfactory Essays
• Satisfactory Essays

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.…

• 512 Words
• 3 Pages
Satisfactory Essays
• Satisfactory Essays

1. Estimate the cost of equity appropriate for the evaluation of the incremental cash flows associated with the Collinsville investment. Estimate the weighted average cost of capital appropriate for discounting the Collinsville plant’s incremental cash flows…

• 445 Words
• 2 Pages
Satisfactory Essays
• Powerful Essays

1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?…

• 2591 Words
• 11 Pages
Powerful Essays
• Satisfactory Essays

Gives students the opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed.…

• 2207 Words
• 9 Pages
Satisfactory Essays
• Good Essays

From their shoes to their professional athlete contracts with huge stars like Kevin Durant and LeBron James and even just their symbol, Nike is a household name. Its extremely hard to go anywhere without seeing a pair of their shoes, their symbol on a piece of some ones clothing, or even spotting one of their backpacks. But does that mean they would be a good investment? This paper aims to analyze the financial situations of Nike and one of its lead competitors, Under Armour, and help decide whether they have investment potential.…

• 533 Words
• 3 Pages
Good Essays
• Good Essays

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.…

• 1383 Words
• 6 Pages
Good Essays