Case: Nike Inc: Cost of Capital
Autor: Laurentiu Matei • February 25, 2019 • Case Study • 526 Words (3 Pages) • 9 Views
Assignment 4
Case: Nike inc: Cost of Capital
1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
The WACC according to Joanna is 8.4%. This is an important metric as it measures the burden a company has to taken on in order to borrow more money. The larger the burden the harder a company has to work in order to turn a profit. The hard a company has to work to turn a profit the less sustainable it is. Therefore it is a metric that measures the opportunity cost of using capital for one investment over the other. Therefore this is an important metric for investors as they must consider it for the viability of long term investment.
I disagree with Joanna’s calculation. The cost of debt is incorrect as you must consider an apples to apples case. The market yield on the same amount of debt must be compared. Furthermore the pre tax cost of debt should be calculated from the debt that is already by the firm. For instance.
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With these two piece of information we can piece together a more accurate picture of WACC
WACC = 7.17% x 27% + 10.5% x 73%
= 8.86%
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.
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3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method?
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CAPM  
Advantages  Disadvantages 






DDM  
Advantages  Disadvantages 






4. What should Kimi Ford recommend regarding an investment in Nike?
Ford should firstly reconsider the numbers given by Joanna. Then once the correct WACC is provided she must compare to the Sensitivity chart:
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Since Nikes current share price is $42.09 then if a discount rate were to be below 11.17% then the share is undervalued. However if it were to be above then it would be over valued. Since the correct WACC was calculated to be 9.26% the share would seem to be undervalued. Therefore according to the Equity chart above and inline with our WACC the share should be valued between $55.68 and $61.25 per share. Furthermore, Ford should add Nike to the Portfolio based on the analysis discussed above.
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