Nike's Cost of Capital

Better Essays
NIKE, INC.: COST OF CAPITAL

Book value vs. Market value While calculating the Nike’s cost of capital using both the book value (Exhibit 1.1) and the market value (Exhibit 1.2), I could notice the mistake Cohen made finding the equity value. Cohen used the book value to reflect equity value. Although the book value is an accepted measure to estimate the debt value, the equity’s book value is an inaccurate measure of the value perceived by the shareholders. Since Nike is a publicly traded company, market value is the better method in reflecting Nike’s equity value. Cohen’s book value of equity is the total shareholder’s equity in the balance sheet, $3494.5. The market value of equity on the other hand, is $11427; computed using stock price X number of shares outstanding ($42.09*271.5 million shares), which is also commonly exercised computing market capitalization of a company in an industry. The book value of equity used by Cohen is very different from the market value of equity. Therefore the weight of debt and equity also differ greatly. Cohen found that Nike is financed by 27% on debt and 73% on equity, but using the market value to better reflect Nike’s debt and equity, I found that Nike is financed by 10.19% on debt and 89.81% on equity. The differences are bigger than it looks, as we are talking about millions of dollars being calculated inaccurately, so it is important for portfolio managers like Kimi Ford to carefully assess the assumptions that are needed to calculate the cost of capital of Nike.

Cost of Debt and Equity Cohen’s calculation for finding the cost of debt for Nike was “total interest expense divided by average debt balance”. I believe this isn’t a good enough calculation because the investors want to know the cost of debt on new debt, not on already outstanding debt. So to calculate a better cost of debt, I used the 20-year Nike Inc. debt with 6.75% coupon paid semi-annually (Exhibit 1.2) to find the yield to maturity. I took an

You May Also Find These Documents Helpful

  • Satisfactory Essays

    | Table of Contents Cost of Capital 2 Value of Equity 2 Cost of Equity 2 CAPM Model 2 Dividend Growth Model 3 Value of Debt 3 Cost of Debt 4 WACC (Weighted Average Cost of Capital) 4 Comparison to Joanna Cohen’s Analysis 4 Financial Statement Analysis 5 Nike Inc. 5 Financial Ratios 6 Leverage Ratios 6 Efficiency Ratios 6 Liquidity Ratios 7 Profitability Ratios 7 Valuation Ratios 7 Conclusion 8 Appendix A – Ratio Calculation 9 Leverage Ratios 9 Efficiency Ratios 9 Liquidity Ratios…

    • 2023 Words
    • 9 Pages
    Satisfactory Essays
  • Powerful Essays

    The Cost of Capital

    • 6125 Words
    • 25 Pages

    Chapter 8 The Cost of Capital 236 CHAPTER 8—THE COST OF CAPITAL TRUE/FALSE 1. Capital refers to items on the right-hand side of a firm's balance sheet. 2. The component costs of capital are market-determined variables in as much as they are based on investors' required returns. 3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 4. The cost of issuing preferred stock by a corporation must be adjusted to an after-tax…

    • 6125 Words
    • 25 Pages
    Powerful Essays
  • Powerful Essays

    Cost of Capital

    • 5336 Words
    • 22 Pages

    product lines, new equipment and other assets, managers must know the cost of obtaining funds to acquire these assets. The cost associated with different sources of funds is called the cost of capital. . If the business earns more than its cost of capital, the market value of the business will increase. Likewise, if returns on long-term investments are below the cost of capital, market values will decline. Therefore, how we manage capital is extremely important to fulfilling the basic objective of increased…

    • 5336 Words
    • 22 Pages
    Powerful Essays
  • Satisfactory Essays

    The Cost of Capital

    • 781 Words
    • 4 Pages

    Questions Case #5 – Marriott Corporation: The Cost of Capital 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? a. What risk free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott’s cost of debt? 4. If Marriott used a single corporate…

    • 781 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    Cost of Capital

    • 1307 Words
    • 6 Pages

    What’s your real cost of capital? By James J. McNulty, Tony D. Yeh, William s. Schulze, and Michael H. Lubatkin Harvard Business Review, October 2002 Issue of the article: valuing investment projects Number of pages: 12 Daniel Miravet Campos Part 1. Executive summary This article is fundamentally based on the exposition of a new method to calculate the cost of capital for a company (MCPM), to meet the inefficiencies of the current one (CAPM). In valuing any investment project or…

    • 1307 Words
    • 6 Pages
    Good Essays
  • Better Essays

    Cost of Capital

    • 1889 Words
    • 8 Pages

    The Cost of Capital for Goff Computer, Inc. Rahul Parikh BUS650: Managerial Finance (MAH1209A) Dr Charles Smith March 18, 2012. The Cost of Capital for Goff Computer, Inc.: 1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) reports to the SEC detailing their financial operations over the previous quarter or year, respectively. These corporate fillings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site, follow the “Search for…

    • 1889 Words
    • 8 Pages
    Better Essays
  • Better Essays

    Cost of Capital

    • 1468 Words
    • 6 Pages

    Cost of Capital Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The cost of capital in operational terms refers to the discount rate that would be used in determining the…

    • 1468 Words
    • 6 Pages
    Better Essays
  • Good Essays

    Cost of Capital

    • 1595 Words
    • 7 Pages

    Cost of Capital Firms need to make capital investment i.e., purchasing fixed assets such as factories, machineries, equipment, etc. After deciding what capital investments to make, they need to decide on the financing – sources of capital. The sources: Long-Term Debt, Common Stock, Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not historical). Cost of Capital - The rate of return that a firm must earn on its investment…

    • 1595 Words
    • 7 Pages
    Good Essays
  • Satisfactory Essays

    cost of capital

    • 724 Words
    • 3 Pages

    What is cost of capital? The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. Importance The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the…

    • 724 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    Cost of Capital

    • 1840 Words
    • 8 Pages

    CHAPTER 11: THE COST OF CAPITAL LEARNING GOALS: 1. Understand the key assumptions, the basic concept and the specific sources of capital associated with the cost of capital. 2. Determine the cost of long-term debt and the cost of preferred stock. 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. 4. Calculate the weighted average cost of capital (WACC) and discuss alternative weighing schemes…

    • 1840 Words
    • 8 Pages
    Good Essays