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Nike Cost of Capital

Autor:   •  October 29, 2017  •  Case Study  •  633 Words (3 Pages)  •  184 Views

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Nike Inc.: Cost of Capital

  1. We believe that it is appropriate to have one cost of capital for valuing Nike as a whole. We believe this to be the case because Nike’s various product segments do not constitute significantly different industries with different risk rates (If the apparel is selling well, so will the sneakers and the other products that they sell). Kimi is interested in a single WACC due to this very reason and also because the WACC is intended to be representative of the cash flows of the company as a whole. As such, it would not be appropriate to use multiple costs of capital to calculate the WACC for Nike.  
  2. We disagree with Cohen’s WACC calculation for the entire firm; we believe that she is wrong because she incorrectly calculates three major components of the WACC: cost of debt, the cost of equity, and the weighting of the components.  For cost of debt, she uses historical data in order to calculate the current cost when instead she should be using the Yield to Maturity of Nike’s bond times the tax shield  in the present to find a more accurate value. For the cost of equity, she uses the wrong beta, using the average beta from 1996 - 2001 (0.8). She should have used the most recent estimate (0.69) instead, as it is more indicative of future betas. In terms of weighting the components, Cohen makes the mistake of using book values instead of market values to calculate the debt and equity components.  The market value should be used over book value it is the best approximation cost of raising capital today since market prices immediate reflect public data.  Therefore it is the most relevant for estimating our  WACC.
  3. The formula we had to use was WACC = (E*rE)/(E+D) + (D*rD*(1-tc))/(E+D).  Our equation consists of the following variables:

E (Total Equity) = current stock value * number of shares outstanding = $42.09 * 273.3= $11,503.20  The share price is used because this gives the market price of the stock rather than any other estimations of what the stock is worth.

D (Total Debt) = $1,277.20. This is the market value of debt as given in the spreadsheet

rE(Cost of Equity) = β*(Market risk premium)+Risk-free rate = 0.69*(5.9%)+5.74% = 9.81%.

rD(Cost of Debt) = 7.126%, calculated from the YTM of Nike’s bond:  

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