# Nike, Inc Cost of Capital

Satisfactory Essays
1140 Words
Grammar
Plagiarism
Writing
Score
Nike, Inc Cost of Capital
1. Weighted Average Cost of Capital (WACC) is used to determine the average cost of financing a company. Companies are funded using both debt and equity and both require varying rates of return. WACC allows you to put a “weight” on the different types of financing and their differing rates to get a total cost of capital.

Team 12 does not agree with Joanna Cohen’s WACC calculation because we feel she took some liberties in her numbers, the most notable being that of equity. Ms. Cohen used book equity, which was \$3,494,500,000. Since Nike is a publicly traded company, the stock price should be multiplied by the number of shares outstanding in order to get the true equity of the firm. 271,500,000 multiplied by \$42.09, would give you \$11,427,435,000 in equity.

In Ms. Cohen’s calculation debt was 27% of total financing and equity was 73%. When using market value for equity those numbers change to 10.2% for debt and 89.8% for equity.

2. Using the following numbers and inputs, our WACC is 9.53%:

To calculate the cost of debt the yield of Nike’s publicly traded debt is utilized:

● N = 40 (semi-annual coupon, 2 x 20) ● PV = \$95.60 ● PMT = 3.375 (semi-annual coupon, half of 6.75) ● FV = 100 (Amount of debt in future)

Inserting the numbers above in our calculations result in 3.583724 for the I/YR which is multiplied by two to get an annual rate of 7.17%. A tax rate of 38% is applied since the federal rate is 35% and the state rate varies from 2.5% to 3.5%. The debt side of WACC would be as follows:

Kd(1-t) x D/(D+E) 7.17(1-.38) x 1,296.6/(12,724.035) 4.44% x 10.2% = .4529%

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%.

Using CAPM, the cost of equity would be as follows:

Ke = Rf + Beta(MRP) Ke

## You May Also Find These Documents Helpful

• Satisfactory Essays

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM). This model takes risk-free rate, beta, and risk premium for each division as for Marriott as a whole. Betas for lodging and restaurants divisions can be calculated from comparable companies. However, information about comparable companies for contract services division is not available. Its beta is derived from the assumption that the overall company's beta is a weighted average of divisional betas.…

• 2497 Words
• 10 Pages
Satisfactory Essays
• Powerful Essays

20-year current yields should be used as market risk free rate since it has the longest period, which is equal to 5.74%…

• 776 Words
• 4 Pages
Powerful Essays
• Satisfactory Essays

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?…

• 7434 Words
• 30 Pages
Satisfactory Essays
• Powerful Essays

a. The cost of debt is the money company has to pay for using the funds. In our case, annual cost of debt is kd: kd/2 = r = 5.0%. kd/2 = (47.5 + [1000-891] / 30) / ((2*891 + 1000) / 3) = 5.5% We have to multiply this by 2 since we are dealing with semiannual payments, hence annual yield is 11%. Because interest is tax deductible, government pays part of the cost, and our component cost of debt is the after tax cost: kd (1-T) = 11% (1-0.4) = 11 *…

• 2180 Words
• 9 Pages
Powerful Essays
• Satisfactory Essays

Cohen's calculation considered the book values to calculate the proportion of equity for calculating the value of WACC which should only be done if the target or market values are not available. In order to determine a more realistic cost of equity, it is recommended to use the market value. The current market share price of Nike as of 2001 is \$42.09 and there are 271.5 total shares outstanding.…

• 2023 Words
• 9 Pages
Satisfactory Essays
• Good Essays

Weighted average: debt to equity ration approximately 60:40 (based on the balance sheet on page 21 of this report )…

• 1335 Words
• 6 Pages
Good Essays
• Best Essays

Brief Description of Verizon Company Verizon communications Inc is an American company that was established in June 2000 when bell Atlantic merged with GTE and the merger took 2 years to close. In 2004 it was added to the Dow Jones industrial average. In 2006 Verizon became the primary provider of advanced communications to large businesses and government sector. Verizon offers the largest high speed 3G and 4G network in America and delivers solutions that allow customers to connect securely.…

• 1022 Words
• 5 Pages
Best Essays
• Satisfactory Essays

To find Nike’s cost of debt, we used three different methods: the Capital Asset Pricing Model (CAPM) (Exhibit 7), the Dividend Discount Model (DDM) (Exhibit 5), and the Earnings Capitalization Model (ECM) (Exhibit 8). We decided that the CAPM gave us the most accurate estimate of Nike’s cost of debt, and we used that in arriving at our before-tax cost of debt of 7.173% and our final after-tax cost of debt of 4.447% (Exhibit 6). To find our WACC, we used the market value of equity and debt to determine our weights of equity and debt. Our weight of equity is 89.947% and our weight of debt is 10.053%. Using the above numbers, we calculated a WACC of 7.338% (Exhibit 9).…

• 393 Words
• 2 Pages
Satisfactory Essays
• Good Essays

Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.…

• 3010 Words
• 13 Pages
Good Essays
• Better Essays

Good morning ladies and gentlemen and thank for taking the time to meet with us. Nike was founded on January 25, 1964 as Blue Ribbon Sports by Bill Bowerman and Philip Knight. The company officially became Nike, Inc. on May 30, 1978. Nike has various products which include footwear as well as other apparel that compliment the former. This accounts for 92 percent of the company’s revenue. The other 8 percent comes from equipment and non Nike brand products, such as Cole Haan. When we were considering on whether it was more appropriate to use multiple cost of capitals for each segment we believe that they all mostly share similar risk factors. We therefore decided to calculate two different costs of capitals, one using the geometric and the other using the arithmetic method. We believe that Joanna Cohen’s methodology in determining if Nike is currently under or overvalued was incorrect. Today we will show you the mistakes that she made and where we believe there was room for improvement. Finally our analysis will prove that Nike is undervalued and that it’s a strong buy.…

• 1258 Words
• 6 Pages
Better Essays
• Good Essays

Joanna’s analysis is partly right. Considering that non-Nike brands only account for 4.5 percent of…

• 461 Words
• 2 Pages
Good Essays
• Good Essays

Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.…

• 875 Words
• 4 Pages
Good Essays
• Satisfactory Essays

 She should use current yields on US Treasuries 3 to 12 months at 3.59% because the yield curve is upward sloping. Upward sloping yield curve means that North Point Group should rely to short-term financing instead of long term financing. In fact, by short term financing, the manager can use cheaper cost of equity. It means that North Point Group should sell the purchased shares of Nike during the period of one year.…

• 988 Words
• 4 Pages
Satisfactory Essays
• Good Essays

Although the management presented its plan to improve on its performance, there were mixed reactions from the third party analysts. Kimi Ford was also not satisfied with the Nike’s analysis therefore she decided that it was necessary to develop her own discounted-cash-flow forecast. She found that Nike was overvalued at the discounted rate of 12% at its current share price of \$42.09. She also did a quick sensitivity analysis which revealed that…

• 859 Words
• 4 Pages
Good Essays
• Satisfactory Essays

In order to solve cost of debt we found the yield of maturity of a 30-year bond of Wal-mart to be 5.022%. The risk free rate was found using the 5-year Treasury bond index value of 2.16% quoted on finance.yahoo.com as of May 7th, 2010. We estimated the market risk premium to be 5.5% given that the historical market risk premium has been between 5% and 6%. To calculate the cost of common equity, we used the Capital Asset Pricing Model. We multiplied the beta of 0.25 by market risk premium, and then added this amount to the risk free rate of 2.16%. We calculated the weight of debt to be 14% and the weight of equity to be 86%. For the weight of debt we divided the Long Term Debt…

• 542 Words
• 3 Pages
Satisfactory Essays