Calculating Wacc

Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted

The report focuses on the Economic Value Added of Nike Inc. The analysis is conducted through a detailed assessment of the financial statements including income statement, balance sheet, and cash flow. Such financial statements are then applied to derive common-size statements for income statement and balance. The trends and predictions obtained from the common-size statements predict the future economic value. Similarly, the Pro-forma financial statements derived provide vital future economic performances of Nike Inc. According to the regression analysis and the assessment of the common-size and Pro-forma financial statements; Nike Inc. has a growth in revenue and earnings per share. The EVA computed using WACC, Net Operating Profit after Taxes (NOPAT), and Invested Capital is positive (+$391.24); this shows that Nike Inc. is financially stable and will grow in the next three years.

The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comp­trol­ler currently uses for the company’s capital structure.

Apparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) too. Because her assumptions such as Revenue Growth Rate, COGS / Sales,

The price of Nike’s common stock has gone down in the past five years. It was at its highest point in 1997 and next highest in 1999.

Nike’s stock market worksheet shows us in general that their financials are in a rising trend. First, their stock value today is 58.43 (positive). In addition, the analysts recommendations are that 14 recommend to buy shares, 5 recommend to hold shares, and 0 recommendations to sell them. Thus, our group’s recommendation is to invest in Nike as a result of the terms above.

1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can

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

Nike’s total revenue has steadily increased over the years. In 2013, Nike’s cash and equivalents totaled of $3.3 billion. This was 25.5% higher than cash and equivalents in 2012. Cash and cash equivalent is one of the big asset account in the company’s assets. Cash increased by 18.5% in 2012, and in 2013 it increased by 44%. Nike has an up and down in short-term investments account. In 2012, the short-term investments decreased by 44.3% but in 2013 it went up almost double by 82.5%. In 2011, investments made up 17.2%, in 2012 investments made up 9.3%, and in 2013 investments made up 15% of the company’s total assets.

Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to two factors.

At this time, Nike presents an interesting investment opportunity. With the consistent longevity of dividend increases coupled with the attractive ROE ratio in comparison to competitors, Nike appears to be a great investment but that may not be the whole story. With an intrinsic value calculated from the discounted cash flow model of $87.84, Nike stock currently seems overpriced. While Nike has a strong history of consistent revenues and profits, which it is poised to continue in the future, and is a global power in its industry, Nike’s recent acquisition of Converse is driving up stock price. In the eyes of Graham this would be an unattractive investment. However, if the gap between stock price and intrinsic vale were to close, I believe this company to be a solid long-term investment in the eyes of Buffett.

Enderle, K., Hirsch, D., Micka, L., Saving, B., Shah, S., Szerwinski, T. (2000, March 14). Strategic Analysis of Nike, Inc. Retrieved on December 14, 2005, from

The Oregon-based company, Nike Inc., is one of the biggest brands across the world. Nike is dominating the segment of athletic footwear, clothing and accessories through a strong market base. According to Yahoo Finance ( 2016), Nike has a market capitalisation of $85.14 billion whereas its competitors such as Adidas (32.63) puma ( 3.68) ralph lauren (8.01) JC Penny ( 2.62). Such a huge market capitalisation has led Nike to have P/E ratio of 25.56 which is lower than the industry (textile – footwear apparel and accessories) of 19.4. This suggests that investors expects the company to grow. Nike has achieved this by clo

In July 2001, NorthPoint Group, a mutual-fund management firm, sought to buy Nike shares for $42.09 per share. Kimi Ford, the portfolio manager, was in a dilemma as some analysts such as Lehman Brothers recommended a strong buy, while others such as USB Warburg and CSFB were against a buy. Kimi decided to find out for herself by developing her own discounted cash flows. She found that Nike at a price of $42.09 is overvalued at a 12% discount rate, but a quick sensitivity analysis revealed that Nike was undervalued at a discount rate below 11.7%. She then had her assistant, Joanna Cohen, calculate the cost of equity. The central issues addressed are:

Our greatest challenge in 2000 will be to maintain the operational and financial initiatives we worked so hard to implement in 1998 and 1999. We must maintain our inventory levels low enough that will allow us to adapt to quickly changing market trends. Financially, we must remain conservative in our cost structure. Cuts to operating expenses of almost $200 million this past year demonstrated that we are